Modern Foods - Disinvestment and After

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Background Note Contd...

In the early 1990s, due to labour trouble, decline in market demand and the closure of a plant, capacity utilisation remained low, between 19% and 30% at the Ranchi unit, between 31% and 53% in the Calcutta unit, and below 50% in the Jaipur, Kanpur and Delhi-11 units. (Refer Exhibit III for unit-wise capacity, production and profits). Consequently, many bakery units were running at a loss.

MFIL fixed a norm of 0.50% of total production as defective production. In addition, a norm of 0.50% for bread returned from the market was also allowed. However, the percentage of defective production and return of unsold, damaged and defective bread exceeded the norms (Refer Exhibit IV & V). Upto 1993-94, the cumulative losses of MFIL's Roller Flour Mill, Fruit Juice Bottling I Plant, Fruit Pulp Processing Plant and Oil Plant were Rs 11.85 million, Rs.64.4 million, Rs.32.40 million and Rs.81.94 million respectively. In 1997, MFIL was referred to the Disinvestment Commission.4 In February 1997, the Commission recommended 100% sale of the company. While making this recommendation, the Disinvestment Commission identified some of MFIL's weaknesses: under- utilisation of the production facilities, large work force, low productivity and limited flexibility in decision-making. In September 1997, the government approved 50% disinvestment to a strategic partner through competitive global bidding.

In October 1998, ANZ Investment Bank was appointed as the Global Advisor for assisting in the disinvestment. In January 1999, the GoI decided to divest up to 74% of its stake in MFIL. An advertisement inviting Expression of Interest from the prospective Strategic Partners was issued in April 1999. Ten parties responded to the advertisement. Of these, only four conducted a due diligence of the company, which included visits to the Data Room, interaction with the management of MFIL, and site visits.

After conducting a due diligence, only two parties remained in the field, and on the last day (October 15, 1999) only HLL submitted a bid. In January 2000, the cabinet committee on disinvestment approved HLL's bid for buying out a 74 per cent government stake in MFIL for Rs 1.05 billion (Refer Exhibit VI for highlights of the strategic sale). As per the agreement signed with the government, HLL would have five Directors on the Board of MFIL, while the government would nominate two people to the Board, including the Chairman.

The agreement restricted the retrenchment of employees within a year of the buy-out. HLL was, however, free to implement a VRS after that period. The government also had the option to sell its remaining holdings to HLL after the completion of the first year and up to the end of the third year of the shareholders' agreement.

The acquisition of Modern Foods provided HLL control over 14 bread manufacturing units and a distribution network⁵ with 22 franchise units. HLL officials said that the vast distribution network of MFIL would help the company's growth in the high-end of the foods business. HLL, which sold branded wheat, felt that it could generate synergies in procurement. This would be critical to success in a low margin, high volume business.

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4] The Commission looking after the GoI's disinvestment programme under the Ministry of Disinvestment.
5] MFIL's network delivers bread to 65 per cent of the bread consuming population in 110 cities across India.