The anatomy of an inexplicable fire sale10 min read . Updated: 17 Sep 2021, 12:56 AM IST
The strange tale of how Goldman Sachs and Mitsui are exiting a ₹500 crore investment for ₹5 lakh
The strange tale of how Goldman Sachs and Mitsui are exiting a ₹500 crore investment for ₹5 lakh
NEW DELHI : In 2013, when Arumugham Mahendran stepped down as managing director of Godrej Consumer Products Ltd and announced he was starting up, the market took note. Credited with creating and nurturing powerhouse brands such as Good Knight and Hit, Mahendran was a highly regarded FMCG executive who was also a nifty dealmaker, having acquired a range of companies around the world for Godrej.
It surprised no one when Goldman Sachs and Japanese conglomerate Mitsui, through associated entities, came on board as investors in his new venture—now called Global Consumer Products Pvt. Ltd (GCPPL). Cumulatively, the two institutions invested more than ₹500 crore in the company. Mahendran had ambitious plans to carve out for himself a part of India’s thriving consumer products market. In December 2014, Mahendran told Business Standard that the goal was to achieve revenues of ₹1,200 crore by 2020 and possibly do an initial public offering (IPO) so that the private equity investors get an exit and a strategic investor could come in.
It’s fair to say things haven’t quite worked out. The company made ₹117 crore in revenue in the year ended March 2020. Investors appear to have soured to Mahendran, who attended his last board meeting at the company in December 2017 and subsequently stepped down as chairman and managing director in early 2018. This appears to be largely unknown as no media reports covered his departure. But that’s just about where the story gets interesting.
In June 2021, the investors entered into an agreement with another company, formed by two GCPPL executives and called Pink Tree Investment, to sell all of their shares in the consumer products company. What doesn’t quite add up are the terms of the sale.
According to the June 2021 share purchase agreement executed between Pink Tree and affiliate entities of Goldman Sachs and Mitsui and reviewed by a Mint reporter, the investors signed away their equity and preference shares amounting to more than 98% of ownership in the company for a consideration of ₹5 lakh.
Not only does the firm not have debt or contingent liabilities (say a law suit or court case that could later impose damages on the company), it had cash and cash equivalents (bank balance and fixed deposits) worth ₹35 crore at the time the agreement was signed, according to documents reviewed by Mint and a person familiar with the numbers who asked not to be named.
Why would someone sell a firm with little liability and more than ₹100 crore in revenue, with ₹35 crore of available cash on its books, for ₹5 lakh?
There is no good answer to this question. And the only entities who might be able to explain either declined to comment or did not respond to Mint’s questions for this article.
A spokesperson for Goldman Sachs declined to comment. Mitsui did not respond to queries. Kamal Agarwal and Sanjay Dawer, owners of Pink Tree as well as executives (Agarwal is chief executive officer and Dawer is chief financial officer) and board members at GCPPL, did not respond to queries.
Mahendran told Mint he had heard about the sale but he did not know anything about its terms. His own differences with the investors were over long term investments into building the brand, he said.
The share purchase agreement says the sellers (Goldman and Mitsui) have decided to sell “due to operational losses over the years by the company, financial under performance over the years, and various commercial considerations…"
There could be a plausible explanation for the seemingly one-sided term of sale. But before we get to it, it would be useful to understand the company a bit closer.
In mid-2012, while still at Godrej Consumer Products Ltd., Mahendran says he evaluated the prospects of entering the food and beverages category after consulting with Bain & Co.
India’s fast-moving consumer goods (FMCG) market is estimated at ₹3.5 trillion. The packaged foods and beverages market, including staples, is over 60% of the FMCG market. Mahendran picked Goldman Sachs after reviewing multiple interested investors. Global Consumer Products was incorporated in 2013—with backing from Goldman Sachs and Mitsui. Mahendran pulled in heavyweights from his years spent in the industry—drawing experienced professionals from Britannia, Ferrero and Cadbury. In all, Mahendran put in less than ₹5 crore of his own capital into the company.
“This was a very unique start-up—in the sense that the promoter brought in his brand equity and experience and some seed money. And he roped in two very high-profile investors with deep pockets, that is Goldman Sachs and Mitsui. And he made business plans which he believed he could achieve," said an executive familiar with the company and who did not wish to be named. “Business plans were vetted by outside consulting firms who also approved and they said they are achievable. So, the investors came in, money came in and companies were started," the person quoted above said.
Mahendran said his initial business plan was to build brands over a five-to-six-year horizon and essentially work like a “synthetic start-up" which requires adequate capital to run. That also meant spending more money establishing brands and winning market share from large established firms such as Nestlé India Ltd, Parle Products Pvt. Ltd, ITC Ltd, Mondelez, etc. The task was arduous from the start.
“I clearly said it will take six years to build a brand, particularly in the chocolate area. And they agreed, they committed and signed the agreement in 2014. We started the venture in 2015-16. By 2016-17—they were not used to seeing this kind of P&L —we were reporting EBIDTA negative," he told Mint over a call.
Mahendran said brand building is a long-term exercise, something he thinks investors failed to recognize.
“So, I did find that particularly Goldman Sachs, as a large multinational fund, came in with certain discussions and agreements but they were not as committed in brand building which needs five to six years minimum," he said.
Those familiar with the firm’s products and those who closely track the fast-moving consumer goods market, however, said the company failed to differentiate its products in the market.
The company’s first product LuvIt chocolate was launched in 2015. The company was run on an asset-light model, which means it worked with third-party manufacturers and did not own or operate factories.
While the company intended to work like a consumer goods start-up—it entered the market looking to take on established consumer packaged goods firms. Several people working in the industry point to a lack of differentiated product line and its entry in highly competitive categories.
“Loyalty in the staples category is quite high and differentiation is critical. Building brand loyalty could take years," said an analyst tracking the FMCG industry.
India’s chocolate and confectionery market is estimated at ₹14,000 crore with a 40% household penetration, according to data from brokerage CLSA.
Meanwhile, by 2015, the country was also seeing a surge of interesting and differentiated start-ups that were looking at more differentiated food products such as health and nutrition bars and organic foods.
The company also sold fruit-based beverages under the brand Cherio and even acquired a Kerala-based Ayurvedic hair care brand Ved Raasa. The former Tamil Nadu-based brand was acquired by Global Consumer Products from Mahendaran's family business.
In 2016, the company planned its entry into the household insecticide market with the launch of DND brand. The plan to launch this, however, invited legal trouble after Godrej Consumer Products Ltd., filed a case against Mahendran in the Bombay High Court citing breach of trust. GCPL claimed that Mahendran could be misusing classified information for his own insecticide business that would compete with GCPL’s Goodknight brand.
To be sure, Mahendran built the GoodKnight and Hit brands in the 1980s while at Transelektra Domestic Products Ltd; the brands were subsequently acquired by GCPL in 1994. Today, GCPL dominates the household insecticides market on the back of these two brands.
Meanwhile, people familiar with workings of GCPPL also point to a high cash burn since the beginning—as it spent money in marketing, building a team of experience FMCG executives as well as offering trade discounts to push more products in the market. In 2015, the firm roped in South Indian actor Siddharth to endorse its chocolate brand. In FY18, the company spent ₹54.4 crore on advertising and promotional spends which includes both below-the-line and above-the-line marketing activities. It reported gross sales of ₹91 crore in the same period. Below-the-line marketing activities are those that involve marketing via in-store visibility and trade activations.
Mahendran said his intent was always to build a brand. “For this, you need to put the money aggressively. The investors did not have the experience of brand building…while they committed and went in for the investment, that mindset experience in FMCG was lacking," he said.
Meanwhile, the firm’s reach in India’s vastly unorganized retail market too paled in comparison to that of companies such as Hindustan Unilever Ltd., the country’s largest packaged consumer goods company that reaches an estimated 8 million outlets. Global Consumer’s products managed to cover only 250,000 outlets—largely in the southern states.
“It started as if it was an established major multinational or a large consumer company and that itself is a very wrong start," said the first executive quoted. However, It did not function like a start-up as Mahendran envisioned it to be, he said.
The fire sale
For all the high costs, lacklustre products, and distribution challenges, the company still managed to build brands, recruit distributors on ground as well as build presence in general and modern trade channels. It employs an estimated 200 people, apart from several sales executives not directly on the firm’s payrolls.
Several people Mint spoke to said this leaves the company at a far greater value than the one it is being sold for.
“If you liquidate this company, there are still intangible assets that you would not see on balance sheet—there are brands in some shape and form, which can be sold. They have a distribution network…it has an IT system, and has an SAP system installed," he added. The company also has state-wide licenses for sale of its insecticide category which is highly regulated. “This itself is quite valuable," one person familiar with the developments at the company said.
While, there’s little doubt that the businesses did not perform as expected, “but we are alarmed by the ₹500,000 figure. That’s sort of the red flag, or one of the red flags," said this person.
Others remain of the view that the company can be turned around if the investors desire so. “They have got some very high-cost things that are happening, just cut those and then you’re into black," said the first executive cited, who chose to remain anonymous. The sale amount sounds “very, very strange," he added. “It is strange that a company with ₹35 crore free cash in bank is being sold for less than price of any entry level Maruti Car," he said.
In its 23 June share purchase agreement, the investors stated that Global Consumer Products had obtained a valuation certificate from a chartered accountant/merchant banker registered with the Securities and Exchange Board of India (Sebi).
“Assuming there are no defaults in debts or outstanding vendor payments and the company is otherwise in good health, it is unlikely that the company with crores in annual turnover, would be valued at ₹500,000," said Sameer Jain, managing partner at PSL Advocates & Solicitors, who commented on the matter based on anonymised details described to him by a Mint reporter.
One of the plausible motivations behind this transaction could be to accommodate aggressive tax optimisation, two people familiar with the deal structure, cited previously in this story, said.
Jain said such a possibility could arise where involved parties want to avoid paying capital gain taxes on share value appreciation, or to also gain tax credits (on losses) to be set-off against future profits. “But the very fact that a merchant banker has certified the value, and that the merchant banker would be Sebi approved, the chances of this are fairly reduced, but they’re not certainly impossible since lot of valuation of items in balance sheet are done notionally", he said.
While Jain said there could be several reasons as to why the company is being sold for ₹500,000, there is also a possibility that the investors find no future prospect in the business. “In such a case investors will book their investment in the company as an impairment loss. However, such impairment loss must be on very cogent and objectively provable basis," he said.
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