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If one bought an asset for £595 million in 2007 and sold it for £408 million in 2014, what is the loss? Simple maths says £187 million. But according to United Spirits Ltd (USL), the loss is Rs 4,652 crore, or £447 million (at the rupee’s current exchange rate of 102/£).
That is the write-off on the Whyte & Mackay sale, for which the spirits maker is seeking shareholder approval through a postal ballot. The deadline for the postal ballot expires on July 2.
If one accounts for the appreciation in the pound through the past seven years, the equation is more interesting. In 2007, when the exchange rate was 81/£, the £595 million spent on the deal was equal to Rs 4,820 crore. At today’s exchange rate, USL’s sale proceeds of £408 million stand at Rs 4,161 crore. At this rate, the loss, in rupee terms, should be just Rs 660 crore. What then accounts for the remaining Rs 4,000 crore?
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USL says it is interest, capex and working capital.
But analysts are puzzled by how USL ran up such huge liability in a benign interest rate environment and on a business the company’s annual reports have regularly termed profitable.
One of the first gaps is in the difference between the loan amount raised for the fully-levered buyout and the deal value. The buyout was financed by a $618.915-million loan from Citibank NA, London Branch (the “Citibank loan”) and a £325-million loan from ICICI Bank UK PLC (the “ICICI loan”). Together, it works out to £635 million, £40 million (Rs 400 crore) more than the enterprise value of £595 million.
Explaining this, USL spokesperson Prakash Mirpuri says, “The difference between the enterprise value of £595 million and the total borrowing of £635 million — £40 million — was used for pension deficit funding (£18 million), expenses related to the acquisition (£15 million), acceleration of certain bulk stock inventory under a legacy contract which Whyte & Mackay had — about £7 million.”
The company has said the loan from ICICI Bank has now been consolidated and refinanced by a consortium of three banks led by Standard Chartered Bank. This, the company has said, will be repaid from the proceeds of the sale of Whyte & Mackay. After meeting transaction-related expenses, etc, the balance would be remitted to India through its subsidiary, it added.
The foreign subsidiary has been profitable and if the profits made but not distributed since from 2007, amounting to £120 million, are taken into account, the loss on the transaction should reduce to that extent.
USL, however, contends this is an incorrect assessment. “The acquisition of W&M was a fully leveraged buyout...The cash profit made at the W&M level was used to partly repay the ICICI loan (which, by 2011, was £355 million), £70 million, interest at United Spirits (GB) Ltd (which had a share in the £325-million loan from ICICI); and, through the years, significant investment in wooden casks, distillery capex and working capital,” Mirpuri said in his response.
In 2010/11, Whyte & Mackay also embarked on a long term strategy of focusing on brands such as Dalmore, Jura and Whyte & Mackay, and reduce the focus on bulk business. According to the spokesperson, this had an immediate impact in the form of lower profits, higher working capital, higher investment in various capital items such as wooden casks, construction of new warehouses, increasing distilling capacity, investment in distillery visitor centres and establishing operations in Singapore and the US, etc. All these investments necessitated further outlay of funds. The spokesperson said despite these drawbacks, the company managed to sell the business at a multiple of about 20, much better than what it was purchased for.
Mirpuri added in the case of the Citibank loan, the company had to take a significant hit due to the currency fluctuations. “The Citibank loan was prepaid in 2009/10. This pre-payment was entirely serviced from USL, India — both interest till 2009/10 (£50 million) and the final prepayment in 2009/10. In 2009/10, at the time of the repayment, the pound had depreciated to 1.61 against the dollar, and this significant 20 per cent depreciation also had to be funded from India; in effect, USL had to repay a principal of £390 million. Through the last seven years, these outward remittances from USL India for interest, principal and, at times, working capital support for W&M are all due to USL India from its subsidiaries.”
He added, “Therefore, there is no difference between purchase price and the loans raised and the write-off.”
J N Gupta, founder and managing director of Stakeholders Empowerment Services, said these explanations, too late in the day, were primarily to justify the write-off and weren’t consistent with earlier disclosures in annual reports. “In all their reports, the company board had indicated W&M was doing well. Their explanation that a lot of funds had been infused towards assets also appears unconvincing, as for 2007-08, total assets of W&M Group stood at £370 million and £306 million for 2012-13. Turnover rose from £151 million to £277 million, indicating even for a higher turnover, profits were low and it did not require higher working capital, as reflected in asset reduction during the period. Further, page 48 of the annual report for 2010 stated loans were non-interest bearing and not refundable, eventually convertible to equity. This indicates the interest, if any, was to be on the books of USL, not W&M,” Gupta said.
He added the company was still holding back the true picture. “All we can say is disclosures are not proper and shareholders would like to know the details. This assumes importance in the light of recent reports that raised doubt on debtors and loans, resulting in delay in publishing accounts of USL; a forensic audit shall be demanded by investors,” he said.
