Modern Foods - Disinvestment and After

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Background Note Contd...

Analysts felt that private-sector interest in MFIL disinvestment could herald a radical change in the Indian market for breads. In the early 1990s, Indian companies were not interested in major investments in the bakery segment, especially breads because of the relatively low margins. MFIL used its status as a government company to procure wheat at subsidized rates. As a result, it could produce and distribute at prices which competitors would not be able to match. The quasi monopoly status bestowed by this cost advantage would vanish after privatisation, making investments in the sector more attractive for others.

Post Sale Drama Analysts felt that the sale of MFIL was well timed since the company was sold as a going concern, not as a BIFR case.6 However, some analysts were of the opinion that the sale was undervalued. Apart from machinery at its 14 bakeries, MFIL had 19 franchises and six ancillary units scattered across the country. Some analysts felt that the real estate alone—16 acres in Delhi, 4 acres in Kanpur and 18 acres in Mumbai— would be worth over Rs 5 billion. They felt that HLL had paid for the brand and got the fixed assets for free. The Comptroller and Auditor General of India (CAG) also criticised the government for not valuing MFIL correctly. The CAG said that the value of the plant and the machinery should have been considered, and not just dismissed as scrap. The CAG also criticised the valuer of MFIL (ANZ Grindlays Bank) for not taking into account the value of surplus land in Delhi Business Unit-I as well as the leased land of the Silchar unit in Assam.

The CAG report stated that the "government seemed to have fortuitously received a bid for a far higher amount from the single bidder compared to the value arrived at by the Global Advisor." ANZ Grindlays Bank valued a 74 per cent stake in MFIL at Rs 463 million, while HLL actually paid Rs 1.05 billion for it.

The GoI said that its decision to sell off 74 per cent of its stake in MFIL to HLL ensured a cash flow higher than ANZ Grindlays Bank's valuation and prevented the company from being declared sick. ANZ Grindlays Bank had valued the entire company at Rs. 785 million only, while HLL had valued MFIL at Rs 1.65 billion. HLL made an upfront payment of Rs. 1.05 billion for the 74 per cent government equity in MFIL, besides agreeing to infuse Rs 200 million for technology upgradation and modernisation.

The GoI also claimed that HLL was the only bidder which submitted a formal proposal and offered a higher sum than ANZ Grindlays Bank's valuation. Thus, the best option before the GoI was to sell majority equity to HLL and save the company from being caught in the BIFR's net.

The GoI also said that the finances of MFIL had come under serious strain: MFIL's net worth had recorded an erosion of 20 per cent in 1998-99, and efforts to turn it around would have required fresh capital infusion to the tune of Rs. 800 million. In addition, when MFIL was sold to HLL, its capacity utilisation was a dismal 15 per cent. Capacity utilization was expected to substantially improve in the near future, with HLL planning a major brand building initiative for MFIL.

Officials of the Department of Food Processing said that with a 75% enhancement in capacity utilisation, a total of about 5,000 employees would be required as against the current strength of just 2,000. According to a senior official, "The employees have gained as they are no longer employees of a potential BIFR company, but are employees of a highly profitable group with no threat to their jobs."

In mid 2000, the officers of MFIL protested against the sale of 74 per cent of MFIL's equity by the GoI. One official said, "The sale of the 74 per cent equity of Modern Foods this January to HLL without our consent amounts to violation of our fundamental rights." Union sources said that as per the terms and conditions of service in PSUs, it was their fundamental right to determine the rightful ownership of the company.

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6] In December 2000, MFIL's losses went up to Rs 470 million and subsequently, under the sick Industries Act, it became a BIFR case.