Muthiah sells Henkel stake to Jyothy

MUMBAI/CHENNAI: HSBC code-named a mandate from Germany's Henkel AG to sell its 50.97% stake in Henkel India (HIL) as "Project Uphill" when they approached potential suitors a few weeks back for a bidding process. Henkel's original Indian business partner A C Muthiah, a septuagenarian tycoon hailing from Chettinad, a region known for its spicy cuisine, did not disappoint them by an independent share sale move that threatens to upset Henkel's plans.
Spic chairman Muthiah's Tamil Nadu Petroproducts Ltd (TPL) held 16.66% stake in Henkel India. On Wednesday, Muthiah agreed to offload most of his stake to Jyothy Laboratories, one of the potential bidders for Henkel AG's stake, at Rs 35 per share in a deal that was struck after hectic parleys last weekend.
TPL's decision to offload shares at Rs 35, at below the prevailing price, might have been based on intelligence that Henkel would probably sell its stake cheaper on account of heavy debts sitting on the Indian unit's books, sources said. Muthiah's efforts for a combined stake sale of the two partners were spurned by the Dusseldorf-based Henkel AG, they added.
Henkel's plan to sell off the debt-laden Indian unit could become a stormy affair depending on how the Germans, and other likely bidders, would react to the latest development.
On its part, Jyothy Laboratories said its move was not hostile as it had purchased only 14.9% stake (hence not triggering an open offer) at the moment. It has the option to buy the remaining shares from Muthiah later, but would do it only after negotiating a larger deal with Henkel AG.
"We are to do a negotiated deal with Henkel," said a senior executive at Jyothy Laboratories who did not wish to be named. Investment bank MAPE advised on Jyothy's share purchase deal with TPL, which is estimated at Rs 60.75 crore.
Muthiah, who was travelling to his hometown near Karaikudi in Tamil Nadu, could not be reached for immediate comments. But sources said Muthiah was free to sell his stake at a fair price to any interested bidder as he was not tied down by any right of first refusal (RoFR) commitment to Henkel. Further, sources close to Muthiah, who has had a chequered relationship with the German promoters, said there was a possibility of Henkel AG offloading stake at a substantial discount to the prevailing market price.
TOI, which first reported on Henkel's move to exit, had raised a query on concerns among some minority shareholders on the possibility of depressed price in its emailed questionnaire.
A Henkel India spokesperson offered "no comment" to a detailed questionnaire on the company's debt and financial details. Harsh Agarwal, director of Emami, which was among the potential bidders, said, "Today's development might derail the sale process."
The information memorandum prepared for the potential bidders suggests that Henkel India's revenue was estimated at Rs 390 crore during 2010, which dropped as much as 18% from Rs 478 crore in 2009. The company reported EBITDA level loss during last year. The Indian unit was also sitting on a debt of Rs 454 crore, besides Rs 68 crore preferential allotment from the parent, which will not be converted and hence adding up to the debt.
The reason why Muthiah is concerned about the valuation is because of Henkel India's high debt, which is backed by corporate guarantees from the parent, which was more keen on being relieved of the same, sources added. In context, it must be mentioned that the firm's market capitalization at Rs 528 crore-the stock has vaulted about 70% on thin trading in the past one month-was almost on a par with the debt on the books.
Sebi is understood to have moved the scrip to the T to T category to discourage investor speculation, including day trading.
Henkel India has had a troubled past with its home care and personal care business failing to challenge bigger rivals Hindustan Unilever and Proctor & Gamble (P&G). The company's prominent laundry and home care brands include Henko (Rs 131 crore), Pril (Rs 67 crore), Mr White (Rs 51 crore) and Chek (Rs 20 crore). Its personal care brands are Margo soap (Rs 78 crore), Fa deodrant (Rs 22 crore) and Neen Active toothpaste (Rs 7 crore).
Henkel AG is expected to buyback the hair colour business under Schwarzkopf! brand from the Indian subsidiary, and a process for the same is underway already.