The warring shareholders of Lilliput Kidswear, private equity investors Bain Capital and TPG, and the promoter, Sanjeev Narula, seem to have found common ground: exit the business.
According to three independent sources aware of the development, all the shareholders have asked their advisors to initiate a slump sale of the business. As a part of that process, the existing kidswear and retail business of the company will be transferred to another company, which will then be sold to a strategic and financial investor.
This is similar to what another Delhi-based retailer, Vishal Retail, did in 2010. An independent auditor was also appointed there to restate accounts before TPG and Shriram Group negotiated with the company’s CDR lenders to buy out the company.
The sources added several private equity investors like TA Associates, India Value Fund, CX Partners and even L Capital have been sounded out. Similar feelers are also believed to have gone out to several textile and retail groups, including Shoppers Stop, Arvind Mills, the Mahindras, Tata Group and Reliance Retail as well, but their names could not be independently verified.
In December, all the three principal shareholders came together to rope in investment bankers Avendus and Grant Thorton to help them raise an additional Rs 500 crore equity in the cash-strapped retailer. This exercise was expected to dilute the stake of all existing shareholders. The two marquee investors had together invested $86 million for 45 per cent stake in Lilliput Kidswear in April 2010. Narula owns the balance 55 per cent.
"The matter is sub judice. So we cannot comment on anything or give any information on the matter at this point. We have been barred by the court," the company's spokesperson told Business Standard. Sanjeev Narula was unreachable. The existing PE investors too did not want to comment. Sanjay S Lalbhai, Chairman and Managing Director, Arvind Ltd, denied that anyone from Lilliput or its bankers had approached his company. Shoppers Stop, Mahindra Retail and Madura Garments executives did not respond to calls and messages on the subject. Mails sent to L Capital and IVF, too, did not elicit any response.
The company’s debt, said officials in the know, ballooned to close to Rs 750 crore and an equity infusion was becoming critical to pay back dues and manage other operating expenses.
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The company has over Rs 30-crore fixed cost every month. Moreover, the ongoing litigation had made it difficult to tap bank financing. The lenders had also refused to release the sanctioned loan amount of Rs 200 crore because of the infighting, forcing Lilliput to meet its daily cash requirements by offering up to 30 per cent discounts at all stores.
In the past one year, Liliput has added close to 100 stores, covering over 600,000 sq ft of space, and redesigned its business model to go for bigger stores. Started in 1991 as a supplier to some large retailers, Lilliput forayed into direct retailing with a store in New Delhi in 2003. The company currently operates 275 stores, occupying a total retail space of 750,000 sq ft, and employs close to 14,000 people.
“Even though the mandate to sell the company was initiated a month back, the actual process will only kick-start once the independent audit of the company gets completed. Only then can one make a proper valuation. Any new investor will doubly check the financials before putting in money as the legal dispute in the company is quite public,” said an official on the condition of anonymity.
The independent audit is due shortly.
But, most of the likely suitors who have been approached even at a preliminary stage have expressed apprehensions of working with the incumbent management. Sources say the company is still making profits at an operating level. Some of the officials even suggested the existing promoters may expect at least Rs 500 crore, the amount mandated earlier. Lilliput posted a net profit of Rs 40 crore on revenues of Rs 565 crore in 2010-11 and is targeting a turnover of Rs 950 crore in the year ending March 2012.
An eventual slump sale will put an end to a bitter fight between all shareholders, on since last September. Matters turned ugly between the two shareholder groups when the matter headed for a legal confrontation at the Delhi High Court.
While the PE investors had accused Narula of fudging the books of the company and not providing access to its financials to auditors, Narula had alleged the investors were trying to stall the company's Rs 850-crore initial public offering and seize majority control.