India Inc sweetens offers for buys abroad

When textile-maker Alok Textiles bought into $22 million Mileta, it left a good 40 per cent share with the existing shareholders, promising them a better valuation if Mileta turned in a good show.

And when KPIT Cummins picked up a majority stake in the US-based SolvCentral for $2 million, it negotiated terms to buy out the remaining stake "over a period and at a price related to the quantity and quality of revenue".

Indian companies are clearly looking to cut a good deal when they buy firms overseas. But they are also trying to minimise risks, often completing the acquisition in stages. They are also leaving something on the table for the promoters in return for their help to learn the ropes.

"Many companies are entering new markets and, at times, even slightly different businesses. So they are willing to live with existing promoters for a while," said J Niranjan, head-investment banking, I-Sec.

With little retail experience even in the home market and unsure of what awaited it in the UK, Welspun India decided to pick up only 85 per cent in UK retailer Christy "We needed support for at least three years to understand the market," said Rajesh Mandawewala, joint MD, Welspun India.

For Alok Textiles, dealing with European fashion houses would not have been easy. So, it bought just 60 per cent of the equity, persuading the promoters to hold on to the rest. "It was critical to retain customers and we needed the promoter-management team," explained CFO Sunil Khandelwal.

Clearly there is something in it for sellers, too. "The existing promoters see value being created by Indian firms and are open to deals offering them an upside. As Mandawewala points out, with marketing and financial inputs from Welspun, Christy should now turn in far better numbers," said I-Sec's Niranjan.

"Since the valuation remains the same, the promoters stand to get much more on higher revenues and profits," he added.

Alok Textiles, too, is dangling a carrot for the Mileta promoters. If they achieve certain sales targets, it will fetch them a 15 per cent premium to the initial valuation of 0.8 times sales. "We have offered them a premium if they deliver," said Khandelwal.

With deal sizes going up and the targets at times far bigger than the acquirers, the financial risks, too, are increasing.

The Pune-based KPIT Cummins Infosystems, which has bought into several overseas firms, has always believed in spacing out transactions. "The idea is to reduce the risk by not paying the entire amount at one go," said CEO Ravi Pandit.

Fast-moving consumer goods player Marico also spaced out the purchase of hair-care brand Fiancee in Egypt, paying some amount up front and the rest after six months, adding a rider to the purchase agreement. "By staggering the payment, we are in a sense de-risking the deal," said CFO Milind Sarwate.

That is also what the Rs 266 crore-AllCargo Logistics, which took over Belgium-based ECUline NV, did. The buyout was executed in three phases with AllCargo first picking up 34 per cent, taking it up to 49.9 per cent and then closing out the rest in June.

"Even though we knew the company fairly well and had been interacting with it, the sheer scale of the transaction was daunting," explains Managing Director Shashi Kiran Shetty.

With 2005 revenues of ¤215 million, ECUline is nearly five times as big as AllCargo.

Even after buying the majority holding in the French company Pivolis for ¤1.75 million in a cash-cum-stock deal, KPIT made it clear to the promoters that the price for the remaining stake would be based on the offshore revenues of Pivolis.

Managements also try to retain employees, at times with sops. "The value of the business lies in the people and we cannot afford to have them walking out," explains Pandit, adding that KPIT offers performance-based incentives.

Typically, it pays one-third of the total value of the deal for a 60 per cent stake initially and for the remainder, the promoters get two-thirds of the deal value, provided they deliver.