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INTRODUCTION
In February 2000, as part of its disinvestment programme, the Government of India (GoI) sold Modern Food Industries (India) Limited (MFIL) to Hindustan Lever Limited (HLL) for Rs 1.05 billion. This was hailed as a major step in the GoI's disinvestment plan (Refer Exhibit I for a list of Public Sector Units (PSUs) approved by the GoI for disinvestment and Exhibit II for the important issues involved in disinvestment). However, some analysts questioned the GoI's decision to sell MFIL - a company with 14 production units spread across the country and almost 0.5 million square meters of land - for just Rs 1.05 billion.
In 2000-01, employees at MFIL accused HLL of trying to shut down some manufacturing units by retrenching more than half of the 2,000 workforce and relying on third parties to meet production needs. By December 2000, 10 months after HLL took over MFIL, its accumulated losses went up to Rs 470.40 million as against its networth of Rs 330.1 billion. Subsequently, under the Sick Industries Act (SICA), MFIL was referred to the Board of Industrial and Financial Reconstruction (BIFR).
In 2001, HLL announced that MFIL would be able to make a cash profit in two years. It announced a turnaround strategy which involved improving the quality of the product and the raw materials (refined flour), improving the manufacturing process controls, and modernizing the plant and machinery. Existing distributors would be trained and new ones identified. HLL was also looking for new outlets that could sell bread. To implement this strategy, HLL invested Rs 80-90 million in MFIL.
BACKGROUND NOTE
Modern Bakeries (India) Limited, incorporated in October 1965, was renamed
Modern Food Industries (India) Limited (MFIL) on 11th November 1982. The
company had 14 bakery units located in 13 cities and 6 other units at other
places. Its products were bread, oil, flour, fruit pulp, fruit juice drinks,
beverage concentrates and energy food. In the early 1990s, the bakery units
accounted for 82% of the turnover of MFIL.
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. 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.
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. In February 1997,
the Commission recommended 100% sale of the company. While making this
recommendation, the Disinvestment Commission ident
ified 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 network 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.
Analysts felt that private-sector interest in MFIL disinvestment could herald a
radical change in the Indian market for breads. In the early 1990s, Indian
companies were not interested in major investments in the bakery segment,
especially breads because of the relatively low margins. MFIL used its status
as a government company to procure wheat at subsidized rates. As a result, it
could produce and distribute at prices which competitors would not be able to
match. The quasi monopoly status bestowed by this cost advantage would vanish
after privatisation, making investments in the sector more attractive for
others.
POST SALE DRAMA
Analysts felt that the sale of MFIL was well timed since the company was sold as a going concern, not as a BIFR case6. However, some analysts were of the opinion that the sale was undervalued. Apart from machinery at its 14 bakeries, MFIL had 19 franchises and six ancillary units scattered across the country. Some analysts felt that the real estate alone-16 acres in Delhi, 4 acres in Kanpur and 18 acres in Mumbai- would be worth over Rs 5 billion. They felt that HLL had paid for the brand and got the fixed assets for free.
The Comptroller and Auditor General of India (CAG) also criticised the government for not valuing MFIL correctly. The CAG said that the value of the plant and the machinery should have been considered, and not just dismissed as scrap. The CAG also criticised the valuer of MFIL (ANZ Grindlays Bank) for not taking into account the value of surplus land in Delhi Business Unit-I as well as the leased land of the Silchar unit in Assam. The CAG report stated that the "government seemed to have fortuitously received a bid for a far higher amount from the single bidder compared to the value arrived at by the Global Advisor." ANZ Grindlays Bank valued a 74 per cent stake in MFIL at Rs 463 million, while HLL actually paid Rs 1.05 billion for it.
The GoI said that its decision to sell off 74 per cent of its stake in MFIL to HLL ensured a cash flow higher than ANZ Grindlays Bank's valuation and prevented the company from being declared sick.
ANZ Grindlays Bank had valued the entire company at Rs. 785 million only, while HLL had valued MFIL at Rs 1.65 billion. HLL made an upfront payment of Rs. 1.05 billion for the 74 per cent government equity in MFIL, besides agreeing to infuse Rs 200 million for technology upgradation and modernisation. The GoI also claimed that HLL was the only bidder which submitted a formal proposal and offered a higher sum than ANZ Grindlays Bank's valuation. Thus, the best option before the GoI was to sell majority equity to HLL and save the company from being caught in the BIFR's net.
The GoI also said that the finances of MFIL had come under serious strain: MFIL's net worth had recorded an erosion of 20 per cent in 1998-99, and efforts to turn it around would have required fresh capital infusion to the tune of Rs. 800 million. In addition, when MFIL was sold to HLL, its capacity utilisation was a dismal 15 per cent. Capacity utilization was expected to substantially improve in the near future, with HLL planning a major brand building initiative for MFIL. Officials of the Department of Food Processing said that with a 75% enhancement in capacity utilisation, a total of about 5,000 employees would be required as against the current strength of just 2,000. According to a senior official, "The employees have gained as they are no longer employees of a potential BIFR company, but are employees of a highly profitable group with no threat to their jobs."
In mid 2000, the officers of MFIL protested against the sale of 74 per cent of MFIL's equity by the GoI. One official said, "The sale of the 74 per cent equity of Modern Foods this January to HLL without our consent amounts to violation of our fundamental rights." Union sources said that as per the terms and conditions of service in PSUs, it was their fundamental right to determine the rightful ownership of the company. The Union complained that HLL had already started pruning the ex isting manpower. They were also apprehensive about the fate of the employees belonging to the backward classes as most of them were taken purely on the basis of their "reserved" status.
TURNING AROUND MFIL
After HLL acquired MFIL, MFIL's losses went up. By December 2000, MFIL's accumulated losses increased to Rs 470 million (in 1998-99, MFIL made losses of around Rs 69 million) as against its networth of Rs 330 million. In early 2001, MFIL was referred to the Board of Industrial and Financial Reconstruction as more than 50% of its networth had been eroded by its losses. Officials of MFIL alleged that HLL wanted MFIL to be referred to BIFR so as to get some relief from banks and financial institutions. They further contended that if HLL had used the Rs 200 million it infused into MFIL as preference share capital instead of loans, MFIL would not have become sick. However, HLL officials said that they had little choice but to go to the BIFR, because MFIL's accumulated losses had exceeded 50 percent of its peak net worth, over a four year period. According to section 23 of the Sick Industries Act (SICA) if a company's accumulated losses over four years exceed 50 percent of net worth, then it has to be declared sick and referred to BIFR.
However, analysts felt that HLL could have prevented MFIL from entering the BFIR's ambit. According to one analyst, "If the amount that HLL brought in was brought as equity or preference capital before December 31, 2000, Modern Food could have escaped the clutches of the BFIR." MFIL officials alleged that referring MFIL to the BIFR was a strategy for retrenching employees and closing unviable units. However, Gunender Kapur, Executive Director (Foods), HLL was of the opinion that taking MFIL to the BIFR was just a 'technicality'; he was confident that in two years MFIL would be able to post a cash profit as a result of the turnaround strategy initiated by HLL. HLL officials also claimed that between February and December 2000, MFIL's sales had doubled.
In 2001, HLL set a two-year timeframe to turn around MFIL. The turnaround included providing financial assistance to distribution channels and introducing better-quality bread ingredients to improve quality.
HLL had already pumped in around Rs 200 million in MFIL by way of secured loans and corporate guarantees. HLL officials claimed that MFIL's sales had more than doubled since it was acquired.Said Kapur, "While we have already achieved a turnaround in sales, a turnaround in financial terms (profitability) will happen in the next two years." The increase in sales (actual figures not revealed) was mainly due to an increase in the number of outlets that sold MFIL bread. In Mumbai, the number of outlets increased to about 250 from 100, and crossed the 400-mark in New Delhi.
Ever since HLL took over the company, it seemed to have focussed on improving the quality of the product and its distribution It also helped MFIL leverage on HLL's strengths in areas such as wheat procurement, communication, treasury, and training. According to Kapur, "Post-acquisition, the task before Levers was not only to increase distribution and sales, but also to ensure that Modern bread's daily delivery system was well established and further strengthened to ensure the delivery of fresh stock of bread twice a day." He further added, "Improvement in quality is an ongoing process which will continue in the year 2001."
In mid 2001, HLL introduced a voluntary retirement scheme for employees of four units of MFIL that were closed and for its surplus employees at other locations. Work was suspended between 1991-99 at four of MFIL's 19 factories-Kirti Nagar (closed since June 1999), Ujjain (closed since March 1994), Bhagalpur (since October 1998) and Silchar (abandoned at the project stage itself in October 1991). Workers in these units were drawing wages. Moreover, many units at different locations had surplus manpower.
HLL officials said MFIL's losses would reduce to Rs. 200 million in 2000-01 from Rs 480 million in 1999-00. In 2000-01, the first year under HLL's management, bread sales of MFIL increased to Rs 1.02 billion from Rs. 780 million in 1999-2000. Growth in bread sales in the first four months of 2001 was 80 per cent over the corresponding period of 2000.
However, MFIL employees were not ready to accept that the performance of the company would improve in the future. Said an employee, "How can HLL revive the company when it's is going about shutting down plants." They pointed out that the units at Bhalgalpur in Bihar and Kirti Nagar in Delhi had been closed and just about half of the Lawrence Road factory in Delhi was operational. The employees were not confident that capacity utilization would go up to 75% as claimed by HLL from the dismal 15% at the time of takeover. Since November 2000, MFIL's franchisees had been turned into ancillaries and as a result, the sales figures of these franchisees had been added to the sales figures of MFIL. The employees therefore argued that there had been no real increase in sales. The employees also felt HLL's turnaround strategy for MFIL would involve shutting down of units, laying off workers and relying on third party production (outsourcing).
However, HLL officials said that its outsourcing plan was based on the presence or absence of an MFIL unit in a given region. For instance, in Mumbai, MFIL had its own plant, so HLL did not outsource bread for that region. On the other hand, in Pune it did not have its own plant and so it relied on an ancillary (Refer Table I for both sides of the story). Kapur said that HLL had no plans for using MFIL's vast stretches of land for its expansion. He said, "We will use Modern's land for Modern's expansions, and nothing else
TABLE I
THE TWO SIDES OF THE STORY
|
MFIL VIEWPOINT
|
HLL VIEWPOINT
|
| HLL made MFIL sick. | MFIL was potentially sick. |
| HLL is outsourcing, not making bread. | HLL is outsourcing where it doesn’t have plants. |
| HLL is shutting down MFIL’s plants. | These plants were set to up to handle MFIL’s diversification. |
| HLL will exploit MFIL’s real estate. | HLL will do so only for MFIL’s own expansion. |
| Workers feel insecure. | Staff reacting well towards HLL efforts. |
In August 2001, Peter Selvarajan, Managing Director of MFIL, said that MFIL would break-even in another two to three years. When the three-year lock-in period would come to an end in 2003, HLL would be able to call for the balance 26 per cent stake of GoI in MFIL, at a price that would not be less than the first acquisition. This price would be determined by an independent accounting agency. Meanwhile, MFIL's management was planning to initiate talks with the employee federations to put in place a streamlined and productivity-linked incentive scheme for its workforce. Selvarajan said that MFIL management would initiate the second round of talks with the two employee federations, Hind Mazdoor Sabha (HMS) and Indian National Trade Union Congress (INTUC), to chalk-out a streamlined productivity-linked package of a permanent nature. Industrial relations had assumed great significance at MFIL after the disinvestment process was initiated, as a result of apprehensions regarding closure of units and subsequent lay-offs, he said.
MFIL's management had initially worked out a one-year agenda with employee federations in September 2000. MFIL had a workforce of about 2000 of which 490 had applied for the VRS scheme introduced by the company in June 2001. Of the 520 applications for VRS, about 490 were cleared at a cost of an estimated Rs 150 million to the company.
In late 2001, MFIL was also looking for ways to spread its manufacturing base and was aggressively setting up ancillaries through arrangements with existing bakeries. The company was exploring the possibility of expanding in big towns, where MFIL did not have a presence, besides spreading to other smaller towns. The next few years would tell whether MFIL could be transformed from an ailing PSU into a breadwinner by HLL.
QUESTIONS FOR DISCUSSION
1. Analysts felt that by taking over MFIL, HLL could consolidate its position in the food business. Identify and describe the synergies that HLL was looking for by taking over MFIL.
2. MFIL was plagued with capacity under-utilisation, and labour problems. Turning around MFIL would not be an easy task for HLL. Discuss the various problems faced by HLL in turning around MFIL.
3. In the early 1990s, the GoI initiated a disinvestment programme. However, the disinvestment process in India was plagued by various problems. Why do you think the
GoI could not expedite the disinvestment programme?
ADDITIONAL READINGS & REFERENCES
1.Das Abhijit and Roy Rajarshi,
HLL may bid for Modern Foods, Business Standard, June 11, 1999.
2.
HMS in court on Modern selloff plan
, Business Standard, August 26, 1999.
3.Kapoor Ravi,
Cabinet okays Hindustan Lever's bid to pick 74% stake in Modern Foods
, Financial Express,January 25,2000.
4.
Modern Foods performance on the ascendant
, Business Standard, July 29, 2000.
5.Singh Namrata,
Modern Foods sales turnover shoots up 100 percent
, Financial Express, January 3, 2001.
6. Mahanta Vinod,
Will the dough rise? Business Today, June 6, 2001.
7. Krishnan Aarti, Modern Foods: Some way to a turnaround?
HinduBusinessline, June 18 2001.
8.
HLL offers VRS for Modern Food staff, Economic Times, July 18 2001.
9. HLL bakes biscuit push with 'Modern',
Business Standard, July 19, 1001.
10. Jain Sunil,
Bread for the price of cake? Indian Express, August 2, 2001.
11. Dutta Jyothi P.T. Modern Foods to break-even in 2 years
, Business Line, August 13, 2001.
12. Ministry of Disinvestment
, Government of India
Monday June 18,2001
Modern Foods: Some way to a turnaround?
Aarati Krishnan
IT is now over a year since Hindustan Lever acquired a 74 per cent stake in PSU bakery major - Modern Foods Industries - at a consideration of Rs 115 crore. From the company's financials for the first year of operations under the new management, it appea rs that a turnaround is still some way away.
In the nine months ended December 2000, Modern Foods had reduced its net losses to Rs 16.04 crore from Rs 45.30 crore in the previous year.
However, the company's accumulated losses had climbed to Rs 47.05 crore (the company's net worth amounted to Rs 33.01 crore by end-2000), making it mandatory for Hindustan Lever to refer it to the Board for Industrial and Financial Reconstruction as a si ck industrial company.
In the first nine months of 2000, there was no dramatic surge in the company's sales. The sales figure of Rs 122.66 crore for the nine-month period suggest that the company has just about maintained the previous year's topline of Rs 160.53 crore for the full year.
The company has saved considerably on staff costs and on processing charges, leaving it with a lower operating loss.
While staff costs accounted for just 17.6 per cent of sales in 2000 (22.5 per cent in 1999), manufacturing expenses were down to 23 per cent of sales, from 35 per cent in 1999. It appears that the company has relied to a larger extent on outsourcing.
While raw material consumption fell by nearly 30 per cent to Rs 68 crore, the company stepped up its purchases of finished goods for resale, from less than Rs 1 crore to over Rs 10 crore in 2000. Modern Foods outsourced around 16 per cent (181 lakh loave s) of the 1,136 lakh loaves of breads, buns and cakes that it sold in 2000.
Raw material costs, which accounted for just 64.9 per cent of sales in 1999, took up a larger 67.7 per cent of sales in the year 2000. Given that wheat prices actually fell sharply over this period, this could be indication that Modern Foods stopped rece iving subsidised wheat supplies from the Government, consequent to the change in management.
In the past, subsidised wheat supplies have endowed Modern Foods with a significant cost advantage, and given competitors such as Britannia a cause for complaint.
While raw material costs escalated, the company appears to have pegged up its product prices marginally. Modern Foods realised Rs 6.15 per standard loaf in the year 2000, up from Rs 6.12 per loaf in 1999. But this hike in prices probably proved inadequat e in making up for the higher raw material costs.
The new management, however, continues to exude optimism on the prospects for the company. In the director's report, Hindustan Lever has claimed a 100 per cent increase in Modern Foods' weekly sales in December 2000, in comparison to the figure in April 2000.
Hindustan Lever is hoping to achieve a turnaround in Modern Foods within the next two years through aggressive sales promotion, relaunch and modernisation of the product and an aggressive distribution push.
Nov 13,2003
BIFR dismisses Modern Food's staff petition
Richa Mishra
New Delhi , Nov. 13
THE Board for Industrial and Financial Reconstruction (BIFR) has dismissed a petition filed by the Modern Food Industries Employees' Union seeking action against the promoters and directors of Modern Food Industries (India) Ltd for violating the orders of the Board regarding disposal of assets.
According to the employees union, the Board while declaring the company sick in January 2002 had directed it and its promoters not to dispose of any fixed or current assets without the consent of secured creditors and the BIFR.
In its petition dated February 2003, the union had stated that on May 2, 2002, the company had sold one of its fixed assets — a complete chilling plant of 15-tonne capacity. Further, it had also come to know that the company had decided to sell off its entire Delhi unit and thereafter many of its assets.
The employees union had therefore requested the Board to seek details from Modern Food on the fixed and current assets sold by it after January 2002. The petitioners also appealed for initiating criminal proceedings against the promoters and directors for violating the BIFR's earlier order.
Responding to the queries on the representation made by the union, the company, through a letter dated June 3, 2003, stated that "Disposal of surplus, obsolete and unused plant and equipment is merely a routine and on-going activity for realising maximum value of such idle assets, which clutter up the shop floor and pose safety hazards. This would also release valuable shop floor and building space for future expansion of manufacturing activities."
The company further submitted that the revival plan as approved was being implemented. Besides, all payments to workers and statutory dues of provident fund, employees state insurance (ESI) and gratuity have been paid on time.
Considering the union's appeal, the Board noted that the representation did not give any information or evidence that may show even prima facie that the company has committed any irregularities.
While dismissing the petition, the BIFR Bench said, "If the union has any specific information on any irregularities committed by the company, they may file a fresh representation along with the supporting evidence to enable the Board to seek necessary clarifications from the company and pass appropriate orders. In the meantime, the Board expects the workers and the labour unions to extend full co-operation for the early revival of the company."
HLL ACQUIRES BALANCE 26% EQUITY IN MODERN FOODS FROM GOVERNMENT OF INDIA
MUMBAI, November 28, 2002:
Hindustan Lever Limited (HLL) has acquired the balance 25.99% of Equity in
Modern Food Industries (India)Limited (MFIL) from the Government of India(GOI)
for Rs. 44.07 crores, thereby completing the disinvestment of GOI equity in
MFIL. In January 2000, HLL had acquired 74% of MFIL equity from the GOI.
MFIL registered a strong 52% growth in sales, under HLL’s management in
2001. It has continued on the growth and revival path in the First Half of
2002, showing a 20% increase in sales over the corresponding period of 2001.
The company recorded a positive operating profit before interest and
restructuring costs, of Rs.1.07 crores as against a loss of Rs.7.78 crores
during the corresponding period of the previous year, and this was achieved
despite a 40% increase in market development costs.
MODERN FOOD INDUSTRIES (INDIA) LIMITED
Modern Food Industries (I) Limited was incorporated in 1965 under the name of Modern bakeries (I) Limited. The present name was adopted in November, 1982 in order to reflect its diversified activities.
Capital Structure:
The authorised share capital of the Company-is Rs.15.00 crores and the paid up capital (including pending allotment) is Rs.8.9843 crores as on 31.12.1992. The outstanding loans repayable by the Company to the Govt. of India stood at about Rs.4.96 crores on 31.12.1992 against about Rs.3.59 crores on 31.12.1991.
Physical Performance:
Bread : The Company continued to produce and market different varieties of bread like white sandwich bread, sweet bread, milk bread, fruity, brown bread and special bread for nutritional programmes at its 13 bread manufacturing units located at Ahmedabad, Bangalore, Bombay, Calcutta, Chandigarh, Cochin, Delhi, Hydrabad, Indore, Jaipur, Kanpur, Madras, and Ranchi. The total sale of bread during the period April 1992 to December, 1992 was 15.32 crores S.L. as compared to 14.81 crores S.L during the corresponding period of last year. The commercial sales during April,1992 to December, 1992 were 12.98 crores SL as against 13.93 crores SL during the previous year, while the nutritional sales were 2.34 crores SL as against 0.88 crores SL for the corresponding period of previous year.
To increase the sales of bread further and to ensure its availability in the far-flung areas where the Company does not have its bread plants, the Company is entering into Franchise Agreement with various private manufactures of bread whereby nutritious breads will be made available to the consumers in far off places. This also brings income in the shape of royalty. During April to December, 1992 the Franchised Units sold 192 lakhs SL and the Company earned Royalty amounting to Rs.10.00 lakhs (approximately).
FRUIT JUICE BOTTLING PLANT, DELHI: The plant continues to produce and market Rasika Fruit Juices and Drinks in bottles and through mobile vans and vending machines. The sale of Rasika during April, 1992 to December 1992 was 1.46 lakh crates (of 24 bottles of 200 ml. each) against 1.98 lakh crates during the corresponding period of last year. Rasika Fruit Drinks are quite popular with the consumers. The company is trying to make the unit's, operations more viable by suitable diversification/ restructuring etc.
BEVERAGE UNIT-AERATED BEVERAGES: The Company is producing and marketing concentrates for various aerated soft drinks and Fruit Drinks to its franchised bottlers located in different parts of the country. The bottlers are producing and marketing aerated soft drinks under the Company's brand names of "Double Seven' Cola, "Double Seven" Orange, Tingler, as Lime lemon drink, and the fruit drinks under the brand name "Rasika". The total sale of concentrate during the period April, 1992 to December, 1992 was 164 units as compared to 425 units during the corresponding period of last year.
OIL PLANT, UJJAIN: During the period April, 1992 to December, 1992 there was no operation in the Solvent Extraction plant as well as in the Refinery Section due to non-availability of job orders. During the corresponding period of last year, the oil plant processed 2699 tonnes of raw materials In the Solvent and Refinery Sections.
EXTRUDER FOOD UNIT, JAIPUR : The unit supplied 950 MT of extruder food during April 1992 to December 1992 as compared to supply of 723.14 MT during the corresponding period of last year, to the various feeding programmes of the Govt. of Rajasthan.
ROLLER FLOUR MILL. FARIDABAD: During the period April., 1992 to December, 1992 the unit has not operated the Mill for production of various milled products In view of low economic viability of the operations.
However, to utilise the infrastructure available and make the operations more viable, the unit has taken up the production of Energy Food for supplies to Bhagalpur Unit for distribution under the various feeding programmes of the Govt. of Bihar.
During this period, the Unit has supplied 6057.50 MT of Energy Food to Bhagalpur Unit.
FRUIT PROCESSING UNIT. BHAGALPUR: This is under lock-out since June 5, 1990 due to disturbed labour situation. Since the cost of shifting of the plant to Mango growing area in Southern part of the country has become uneconomical, the Company has decided to dispose of the plant and machinery. In its place, Company is setting up an Energy Food Unit under the Feeding Programmes of the Bihar Govt. In meantime, the Unit is supplying Energy Food obtained from RFM, Faridabad through its Patna godown to the Feeding Programmes of the Bihar Govt.
RESEARCH AND DEVELOPMENT
SPECIFIC AREAS IN WHICH R&D WORK WAS CARRIED OUT BY THE COMPANY
R&D Centre's activities encompassed several areas and aspects relating to product development, process/product standardisations, cost economisation through appropriate product mixes and processes.
Pilot scale production of RTS Carbonated Fruit based averages to assess the techno commercial feasibility, development of synthetic fruit flavoured concentrates, rusks variety breads and buns, energy foods and extruder foods are some of the areas R&D Centre has worked on. R&D Centre played a major role in fixation of norms in the review of yield standards and different varieties of bread.
BENEFITS DERIVED AS A RESULT OF THE ABOVE R&D WORK
Better yield in energy food production are being achieved with the implementation of recommendations given by R & D Centre. With the pioneering work on carbonated fruit based beverages, a range of aerated and more nutritive RTS beverages would be available to the consumers. Modifications in product mix with extruded food and energy foods meant for nutritional supplies would help the Company in saving on material costs. Bread improver system being developed is an attempt in a similar direction. Variety bakery products developed would help the company for future expansion and diversification of product mix.
FUTURE PLAN OF ACTION
R&D Centre contemplates to work in a number of areas to include RTE Extruded and expanded foods for commercial exploitation, modified energy foods, bread improver systems, variety cakes and development of packaging materials and processes for Company's products.
FUTURE PROJECTS :
a. Pineapple Juice Concentrate Plant, Silchar: Due to non feasibility, this plant is proposed to be disposed off.
b. Installation of 6th Brdead Line at Delhi is expected to be commissioned by Feb., 1993
c. Poshahar Plant at Udaipur : The Company proposes to set up a Poshahar Plant at Udaipur as a captive unit for manufacture and supply of Poshahar to the State Govt. of Rajasthan. The site for the project has been acquired and Techno-Economic Feasibility Report has been prepared and approved by the Board of Directors. However, the State Govt. of Rajasthan has changed the formulation of Poshahar and is also yet to sign a memorandum of understanding with the Company in respect of supply/ purchase price etc. Company is awaiting the clearance of the Govt. of Rajasthan for taking further necessary action in the matter.
d. Project under consideration : The company is examining diversification into other areas such as manufacture of high nutrition food poshahar/wheat based energy foods and beer manufacture etc.
FINANCIAL PERFORMANCE :
a. Turnover : The company's turnover during April 1992 to December, 1992 is Rs.6051 lakhs as compared to Rs.4334.06 lakhs in the corresponding period of last year. In 1991-92 turnover was Rs.6550.69 lakhs and Rs.5775.04 lakhs for 1990-91. For the year 19920-93 it is estimated that the turnover of the Company would be Rs.8015 lakhs.
b. Profit/losses : The company incurred loss of Rs.3.02 crores during 1991-92 as against Rs2.57 crores in 1990-91. For the period April, 1992 to December, 1992 the company has earned a profit of Rs.1.38 crores (approximately) and over all profit for the year 1992-93 is estimated to be Rs.1.48 crores.
c. Staff strength : The staff strength in position as on 31.12.93 was 2577
against sanctioned strength of 3040. The number of Scheduled Castes and
Scheduled Tribes on the date was 516 SC and 71 ST respectively and
Ex-Servicemen 58.
ANNEXURE
MODERN FOOD INDUSTRIES LTD
Modern Food Industries, Ltd. manufactures bread products, cakes, and fruit
juices. It has bakery units in Ahmedabad, Bangalore, Calcutta, Chennai,
Chandigarh, Cochin, Delhi, Hyderabad, Indore, Jaipur, Kanpur, Mumbai, and
Ranchi. The company also produces fruit beverages, energy food, and extruded
food at Delhi, Faridabad, Bhagalpur, Kanpur, and Jaipur. Modern Food
Industries, Ltd. was formerly known as Modern Bakeries (India) limited. The
company was founded in 1965 and is based in New Delhi, India. Modern Food
Industries, Ltd. operates as a subsidiary of Hindustan Lever,
Richa Mishra
New Delhi , Nov. 13
THE Board for Industrial and Financial Reconstruction (BIFR) has dismissed a
petition filed by the Modern Food Industries Employees' Union seeking action
against the promoters and directors of Modern Food Industries (India) Ltd for
violating the orders of the Board regarding disposal of assets.
According to the employees union, the Board while declaring the company sick in
January 2002 had directed it and its promoters not to dispose of any fixed or
current assets without the consent of secured creditors and the BIFR.
In its petition dated February 2003, the union had stated that on May 2, 2002,
the company had sold one of its fixed assets — a complete chilling plant
of 15-tonne capacity. Further, it had also come to know that the
company had decided to sell off its entire Delhi unit and thereafter many of
its assets.
The employees union had therefore requested the Board to seek details from
Modern Food on the fixed and current assets sold by it after January 2002. The
petitioners also appealed for initiating criminal proceedings against the
promoters and directors for violating the BIFR's earlier order.
Responding to the queries on the representation made by the union, the company,
through a letter dated June 3, 2003, stated that "Disposal of surplus,
obsolete and unused plant and equipment is merely a routine and on-going
activity for realising maximum value of such idle assets, which clutter up the
shop floor and pose safety hazards. This would also release valuable shop floor
and building space for future expansion of manufacturing activities."
The company further submitted that the revival plan as approved was being
implemented. Besides, all payments to workers and statutory dues of provident
fund, employees state insurance (ESI) and gratuity have been paid on time.
Considering the union's appeal, the Board noted that the representation did not
give any information or evidence that may show even prima facie that the
company has committed any irregularities.
While dismissing the petition, the BIFR Bench said, "If the union has any
specific information on any irregularities committed by the company, they may
file a fresh representation along with the supporting evidence to enable the
Board to seek necessary clarifications from the company and pass appropriate
orders. In the meantime, the Board expects the workers and the labour unions to
extend full co-operation for the early revival of the company."
Modern Food Industries (India) Limited (MFIL)
MFIL was incorporated as Modern Bakeries (India) limited in 1965. It had 2042
employees as on 31.1.2000. It went through minor restructuring during 1991-94
when its Ujjain Plant was closed, the Silchar project was abandoned and the
production of Rasika drink was curtailed. The company was referred to
Disinvestment Commission in 1996. In February 1997, the Commission recommended
100% sale of the company, treating it in the non-core sector. While making this
recommendation, the Disinvestment Commission cited under- utilisation of the
production facilities, large work force, low productivity and limited
flexibility in decision-making, as some of its weaknesses.
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 disinvestment. In
January 1999, the Government decided to raise the disinvestment level to 74%,
and an advertisement, inviting Expression of Interest from the prospective
Strategic Partners, was issued in April 1999.
Pursuant to the advertisement and other marketing efforts by the Advisor, 10
parties submitted Expressions of Interest. Out of these, only 4 conducted the
due diligence of the company, which included visits to Data Room, interaction
with the management of the MFIL, and site visits. After due diligence, only 2
parties remained in the field, and on the last day for submission of the
financial bid (15.10.99), the only bid received was that from Hindustan Lever
Limited (HLL). The Government approved the selection of HLL as the strategic
partner in January 2000, and the deal was closed on 31.1.2000.
As per the accounting procedure prior to disinvestment (31.1.2000), MFIL did
not make any provisions for old receivables outstanding for more than 5 years.
After privatisation, the new management provided for all outstanding
receivables that were over 3 years old, on the ground that it was warranted by
the strict application of the accepted accounting principles. The revised
accounts, thus prepared, showed an accumulated loss of Rs. 3099.97 lakh, and
Net Worth Rs. 201 lakh. Since the Net Worth of the company got eroded by more
than 50% of its peak Net Worth (Rs. 1756.79 lakhs) during the immediately
preceding four financial years, MFIL had to file a report with the BIFR in
accordance with the requirements of Sick Industrial Companies (Special
Provisions) Act, 1985.
The following Table shows the highlights of the Strategic Sale.
Nandita Markandan & H B Soumya
A brief history
Modern Foods India Limited was set up under the Colombo assistance plan. It was
wholly a Central Government owned PSU. Prior to disinvestment the authorised
capital of the company was Rs. 15.00 crore and the paid up capital was Rs.
13.01crore. In its diversification programme, the following operations were
undertaken:
- Transfer of the Fruit Juice Bottling plant at Delhi.- Transfer of solvent
extraction plant at Ujjain.- Transfer of maize mill at Faridabad.- Launching of
'77 Cola, '77 Orange and Lime Lemon Tingles.- Proposal to set up pineapple
juice concentrate plant at Silchar.- Fruit and Vegetable pulping plant at
Bhagalpur.However, huge losses were incurred in these activities. The company's
earnings were eaten away by these activities. E.g. the plant at Bhagalpur
mainly focussed on mango pulping but was located far away from the mango
producing orchards. The excess expenditure on transporting mangoes to the plant
had made the entire system unfeasible.
Hence, an exercise for reconstruction of its operations was undertaken, which
constituted the following:
- Shutting down of the solvent plant at Ujjain.- Abandoning of the pineapple
juice concentrate plant at Silchar - Reconstruction of the fruit juice bottling
plant at Delhi to make "Rasika."
- Conversion of the maize mill into a roller mill.- Conversion of the plant at
Bhagalpur to manufacture energy foods.- Ancilliaration was adopted where the
company needed extra capacity to meet market demands over and above the
production capacity of the company's plants.- Franchising of small-scale
industries that put up bakery units under their brand name was adopted,
provided a royalty of 1.5% of the turnover was paid Reason behind privatisation
100% disinvestment was recommended by the disinvestment commission, as MFIL was
not a core industry. Further, its production facilities were being
underutilised. A large labour force, relatively low labour productivity and
limited flexibility in decision making were other reasons for concern.
However only 50% 0f the disinvestment was approved by the cabinet in its
meeting. An inter ministerial group consisting of representatives of the
administrative department, department of public enterprises and department of
economic affairs and the chief executive of MFIL was appointed and ANZ
Grindlays bank was selected as the global advisor.
It was found that 50% disinvestment would not have got an attractive offer.
Evaluation of the company at 50% would be substantially lower. Therefore, the
government decided disinvestment of 74% of the company.
The reasons for privatisation were as follows:
1. Continuing operations under the existing scenario, the costs would have
tremendous costs.
2. A Net worth erosion by 20% in a year.3. An investment of Rs. 80 crore in
machinery would be required to turn the
company around.
4. Management skills would have to be changed which would be very difficult.5.
Taxpayer money would be removed from a very volatile business.6. Taxpayers
would gain Rs. 109 crore.
7. MFIL would not become a BIFR company.
Method of selection
A committee comprising of the following was set up:
1. Joint secretary (DEA)
2. Joint secretary (DPE)
3. Joint secretary (FPI)4. Director (FPI)5. Representative of ANZ6.
Representative of AS & FA (FPI) as its chairman
The following accounts were taken into account:
1. Assessment report of ANZ
2. Valuation report of MFIL by ANZ3. Valuation report of MFIL by independent
valuer4. Draft share purchase5. Shareholders agreement6. Performance report by
MFILDifferent methods of valuations may be used to value a company at the time
of privatisation. For MFIL the discounting capital flow method was used. The
Net Assets method would not be appropriate in this case as it is used only when
the assets of the company are being liquidated. Method of evaluation
The entire company was valued by ANZ Grindleys (which was the Government's
valuer) at 78.55 crore while HLL's valuer, ICICI investments estimated the same
at 165.47-15.95 crore (net of external debt). On January 31, 2000, HLL paid
Rs. 105.45 crore for 74% of the shares along with an agreement to invest a
further Rs. 20 crore in MFIL. However, it seems that the only bidder for MFIL
was HLL. (Nestle initially seems to have shown interest, and had even valued
MFIL at 65 crore but later backed out.) MFIL seems to have sold for more than
the valuer's price.
Protection from asset stripping
Even though only 26% of the shares would be owned by the Government (74% has
been privatised), it would keep the veto power with itself. For any large-scale
sale of land or other assets the Government 's approval would still be
required. This has been done to prevent asset stripping. If and when the
government decided to sell its 26% an agreement was to be worked out whereby no
real estate deal could take place for a specified period of time.
Share purchase agreement
Within 90 days following 31.01.2000, MFIL had to have its accounts audited for
the period 1.04.1999- 31.01.2000 by an auditing firm listed on the C & AG's
approval panel selected jointly by the Government of India and HLL.
According to the agreement, if the net working capital on the closing date be
greater than the net working capital in the year 1999, then HLL would have to
pay the Government of India the difference multiplied by 0.74. If the working
capital in the year 2000 be lesser than that in the year 1999, then the
Government of India would pay HLL the difference multiplied by 0.74.
In case of debt amount, if the closing date debt amount be greater than the
1999 year's debt amount, then the Government of India would pay HLL the 0.74
times the difference and if the closing date debt amount be lesser than the
1999 year debt amount, then HLL would pay the Government of India 0.74 times
the difference.
Provisions made for the workers
Provisions were made in the share purchase agreement and shareholders agreement
between the government, HLL, and MFIL.
Workers would enjoy protection under the industrial disputes act, 1947.
Retrenchment of workers would be according to the provisions of the Industrial
Disputes Act (IDA) 1947, which also includes a clause on the process of
retrenchment in the case of transfer of ownership or management. For this the
following would be mandatory:
·
Prior notice
·
Government approval
·
Adequate compensation
However this clause would apply only during complete transfer of ownership.
(The Government has privatised only 74% of MFIL, but has still assured that any
retrenchment will be only under the clauses of the IDA).
The Hind Mazdoor Sabha has been handling the case of the workers of MFIL. Mr
Nagpal, the General Secretary verified that not a single worker had been
retrenched by HLL and that they did not have any complaints against HLL till
date.
HLL's plan for MFIL
1. HLL also initiated a scheme for revival of MFIL, which consisting of:
2. Using HLL's strengths in wheat procurement etc. to aid MFIL
3. HLL has also invested Rs. 20 crore in the revival package.4. Using superior
marketing techniques5. Improvements in quality and distribution.6. Improvements
in communication and treasur
Latest developments
In February 2001, HLL was referred to Board of Industrial and Financial
Reconstruction (BIFR). This came as a complete surprise as MFIL had nearly
doubled its sales in the period after privatisation. No reasons were given by
HLL for this action. The BIFR also refused to divulge the reasons on grounds of
preserving confidentiality in this matter.
A Company may be referred to the BIFR under the provisions of the Sick
Industrial Companies Act (SICA). Clause 22 of this act specifies the conditions
under which legal proceedings, contracts etc. may be suspended.
The act states that " the Board may declare with respect to the sick
industrial company concerned that the operation of all or any of the contracts,
assurances of property, agreements, settlements, awards, standing orders or
other instruments in force, to which such sick company is a party or which may
be applicable to such sick industrial company immediately before the date of
such order, shall remain suspended or that all or any of the rights,
privileges, obligations and liabilities accruing or arising thereunder before
the said date, shall remain suspended or shall be enforceable with such
adoptions and in such a manner as may be specified by the Board."
In case of a loss of 50% of net worth a company may be referred to the BIFR.
The BIFR has the authority to approve the scheme of revival in case it is put
forth. The Board has yet to submit its report. In the meantime one can only
hypothesise about the reasons for the submission of MFIL to BIFR and their
subsequent action on it.
Lack of transparency
One of the main grievances of the Hind Mazdoor Sabha was the excessive secrecy
surrounding this matter both on part of HLL as well as on part of the
Government Mr. Nagpal, the General Secretary of the HMS said that he had
written repeatedly to the Disinvestment Commission of GOI to request for a copy
of the shareholders agreement but to no avail. The Government has withheld
information on the same and to date do not have a copy of the shareholders
agreement. This delay in obtaining the shareholders' agreement reflects the
inherent lack of transparency.
With the Government refusing to reveal as much as the shareholders' agreement,
speculations about the fate of MFIL continue to spread. The HLL now claims that
the assets that it received from the Government after the agreement fell short
by Rs. 30 - 40 crore and hence it desires compensation for this shortfall.
Others seem to think that this allegation is a ploy on the part of HLL to
acquire the remaining 26% of the shares from the Government. Another line of
thought is that since HLL maybe keen on shutting down a few unfeasible plants,
but is not authorised to do so, it might be taking shelter under the BIFR
umbrella to serve its ends.
Whatever may be the case, in the end, improper implementation of privatisation
seems to be the bane of the idea. Issues of valuation, transparency and workers
causes need to be addressed in a way satisfactory to all parties in the deal.
References
1. Malvika Goel, India
Today
May 21, 2002 (Hinduonline-biz news)
Richa Mishra
NEW DELHI, March 20
THE Board for Industrial & Financial Reconstruction (BIFR) has approved the
rehabilitation package submitted by Modern Food Industries (India) Ltd (MFIL).
MFIL was the first Government company to be privatised.
In a hearing held in January, MFIL was declared a sick industrial company in
terms of Section 3(1)(o) of the Sick Industrial Companies (Special Provisions)
Act, 1985.
During the hearing, the company had submitted that it could make the networth
exceed the accumulated losses within the reasonable period on its own without
any relief and concessions and would submit a revival package, the Bench noted.
The BIFR Bench had directed MFIL to submit a rehabilitation package after
obtaining the consent and signature of the secured creditors and all concerned.
Besides, the company and its promoters were also directed to hold discussions
with the workers' union to enter into a long-term agreement with them for
three-five years covering, inter alia, VRS, retrenchment, sacrifices to be made
by the workers and ensuring their whole-hearted co-peration in the
rehabilitation of the company.
MFIL, vide its letter dated February 13, 2002 submitted a revival plan.
Punjab National Bank (PNB), the secured creditor, has submitted that the
proposed rehabilitation plan has been drawn with its assistance, the Bench
noted.
Further, PNB was also agreeable to provide a need-based working capital
facility as provided in the scheme, subject to the condition that the facility
would be guaranteed by Hindustan Lever Ltd (HLL), the promoters of MFIL.
The board also observed that the company had not requested any reliefs and
concessions from any other agency. The company has also undertaken to meet any
additional requirement of funds from its own source/borrowings from HLL.
In terms of the revival plan submitted by the company, the Bench noted that
MFIL would start generating profits from the year ending December 2004. The net
worth of the company would become positive in the year ending December 2007.
The major assumptions of the revival plan include increase in sales turnover
from Rs 229 crore in 2001 to Rs 634 crore in 2007 and the profit before
interest and tax is expected to be positive by the year ending December 2003.
·
MFIL was a loss making PSU prior to disinvestment. However, post disinvestment
wages have increased by an average of Rs 1800 per employee. The VRS package
given to employees is more beneficial as compared to the DPE guidelines. Its
turnover has increased substantially and losses have come down substantially.
The Strategic Partner has funded the revival plan which has brought MFIL out
of BIFR purview.
Modern Food Industries
07/12/2007 (economic times)
MODERN FOOD INDUSTRIES (INDIA) LIMITED
S.No.
Particulars
April' 92
Dec., 92April' 91
Dec., 91Expected
(92-93)Actual
(91-92)
1.
Bread Sales (in Crores SL)
Commercial
Nutritional
Total
2.
Fruit Juice Bottling Plant : Sales
(In lakh Crates-1 Crate-24
Bottles of 200 ml. each)
3.
Beverage Unit : Sales Aerated beverages:
(In Unit of 10 Kg each)
4.
Oil Plant Ujjain :
a) Solvent Plant :
(Raw material Processed in-tonnes)
b) Refinery :
(crude oil Processed-in tonnes)
5.
Extruder Food Plant-Jaipur
(Sales in Tonnes)
6.
Roller Flour Mill-Faridabad :
a) Sales in Connes of Maida Atta etc.
b) Desatch of Energy Food in MT to Bhagalpur
7.
Fruit Processing Unit Bhagalpur Sales in M.T. of Energy food.
23/06/06 – economic times
MUMBAI: Hindustan Lever, the country’s largest consumer goods company, is
selling Modern Food, the bakery company it bought from the central government
in the country’s first privatisation deal in ’00 and which it has
struggled to turn around ever since.
Top sources said that Lever’s decision is based on a hard analysis of
Modern Food’s current financial strength, market position and future
prospects for growth. It is also derived from Lever’s own strategy of
focusing on the core business of personal products, soaps and detergents and
beverages and exiting non-core, non-essential areas.
“The company does not comment on market speculation,” a Lever
spokesperson told ET. Top sources added that a process has already begun and
preliminary interest has been shown by some buyers.
The identity of the potential buyers for Modern Food is not known. ITC, which
is pushing aggressively into foods and Britannia, could be in the race, though
the problems that Lever faced would also make them pause.
Modern Food was the then NDA government’s first privatisation deal in
’00, ahead of Balco, Hind Zinc, Paradip Phosphates and VSNL. HLL bought
74% in Modern for about Rs 105 crore amidst huge expectations and investor
interest over the company’s foray into foods.
In the late 1990s, when KB Dadiseth was the chairman, Hindustan Lever planned a
big foray into foods with a thrust on traditional items that consumers buy
regularly. “We want to give Indian consumers what they put on their plate
every day,” was Mr Dadiseth’s common refrain.
The company planned to retail atta, salt, spices and Modern Food, with its
strong brand name and country-wide distribution reach, was supposed to be the
vehicle for an ultimate foray into biscuits.
Obviously, things did not proceed as planned. Lever has had to cut back on its
ambitious targets such as a big push into atta and salt, while spices never
took off. A slowing economy in the early years of this century and intense
competition in key areas forced Lever to focus on its basic businesses and
sharply reduce in size and scope, the huge plans for selling basic foods.
The Modern Food experience was also not smooth. High costs, a recalcitrant work
force and the problems of retailing a perishable, low-margin, low-value
commodity like bread created huge headaches.
Lever’s strategy was to use the Modern Food distribution network to sell
fresh foods and bread across the country.
BIFR dismisses Modern Food's staff petition
1.
Authorised share capital
Paid up capital
Losses 1998-99
Losses 1999-00
**(Inclusive of an amount of Rs. 35.19 cr. towards provisions made for previous
years.) Number of employees
Rs. 15.00 cr.
Rs. 13.01 cr.
Rs. 6.87 cr
Rs. 48.23 cr **
2042
1.
74% of the shares sold for Rs. 105.45 cr. and further Rs. 20 cr. Invested by
HLL in the company.
2.
Net Worth (and total expected realisation) as per DPE Survey 1998-99
Value of assets as per 31.3.99 accounts:
Gross
Net
Market value of land & building as per Government valuer (unrestricted use)
Rs. 28.51 cr.
Rs. 38.76 cr.
Rs. 18.99 cr.
Rs. 109.00 cr.
2.
Thus, the Government gained by selling Rs. 1000 shares for Rs. 11,490, i.e.more
than 11 times the face value & 3.68 times the Book Value.
Valuation of 100% equity by different methods - as done by global advisors
Rs. 30 cr. to Rs. 70 cr.
3.
HLL's share value went up from Rs. 2138 on 30th Dec. (prior to sale) to Rs.
3247 on 25th Feb. (post sale).
.
4.
The employees of a company incurring losses became HLL employees - an efficient
company. The Shareholders' Agreement envisages:" the parties envision
that all employees of the company on the date hereof will continue in the
employment of the company."
Company referred to BIFR, which was inevitable. Now HLL will pick up the bill
for restructuring.
Post - Disinvestment Scenario
Modern Foods Industries Limited: A Case Study
The decline in the sales of Modern Bread, which continued till the beginning of
2000, has been arrested. Weekly sales in December 2000 were around 44 lakhs
SL, which is a 100% increase over the figure of April 2000.
As on 31.12.2000, HLL has extended secured corporate loans to MFIL to the
extent of Rs. 16.5 crores for meeting the requirement of funds for working
capital and capital expenditure.
HLL has provided a corporate guarantee to MFIL's banker, viz., Punjab National
Bank, which has helped the Company in getting the interest rate reduced
considerably to the extent of 3-4% of its earlier borrowing cost.
Steps have been taken to improve the quality of bread, its packaging and
marketing with trade-promotion activities, and to train the manpower in quality
control systems.
November,2002 wages have increased by an average of Rs.1800 per employee.
Rs. 30 crore has been spent VRS Rs. 7 crore infused for safety & hygiene
purposes at various manufacturing locations
Modern Foods revival plan okayed
Modern Food Industries (MFIL), incorporated in 1965, was privatised by way of
strategic sale in January 2000. It was the first-ever strategic sale of a
state-owned company to a major multinational affiliate.
The bidders included biggies like Britannia, Evergreen and Nestle, but the
government finally sold off 74% of its stake in the Rs 171-crore MFIL to
Hindustan Lever for a total consideration of Rs 105.45 crore. This strategic
sale to a leader in the consumer goods sector enabled the government to exit
from non-strategic sectors and enabled MFIL to realise its full potential. The
acquisition has been positive for HLL, too, which has been eyeing the bread and
biscuit segment.
MFIL, which manufactures and sells bread and cakes under the popular brand name
of ‘Modern’, has an installed capacity of 268 million standard
loaves of bread per annum. It has 14 production units and 24 franchises in
various parts of the country. MFIL has a presence in 110 class-I towns and a
daily distribution reach to 1 lakh outlets.
HLL injected fresh equity of Rs 20 crore into MFIL by way of a preference share
issue and also invested Rs 3.5 crore towards modernisation of plant and buying
of new equipment. HLL is in the process of implementing a comprehensive
turnaround strategy for MFIL. Post-privatisation, sales of MFIL have been upped
from 20 lakh loaves to 45 lakh loaves a week.
Meanwhile, in June this year, HLL offered the 1,600 employees of MFL a VRS
scheme, with 65 days of salary for every one year of service rendered. The VRS
scheme, offered in 19 units of MFIL (15 running and 4 closed) to 490 employees,
meant a total outgo of Rs 15 crore to HLL.
MUMBAI: Middle East-based Switz Group, owned by Mumbai’s Khorakiwala
family, is set to buy Modern Foods from Hindustan Unilever (HUL), bringing an
end to the Anglo-Dutch MNC’s seven-year ordeal with the country’s
first PSU divestment.
According to people close to the development, the about Rs 100-crore deal is
expected to be announced shortly. Switz Group, a foods major with operations in
Dubai, Saudi Arabia and Muscat, is owned by Taizoon Khorakiwala, the youngest
son of Fakhruddin Khorakiwala, the former Mumbai sheriff. The Khorakiwalas own
and operate the Wockhardt and Akbarallys group of companies and the Monginis
brand of bakery products.
Incidentally, HUL insiders see Modern Foods as a symbol of how their famed
management culture and systems came a cropper in the face of a hidebound PSU
culture. As soon as HUL achieved break-even last year after a “Herculean
effort”, it tried to sell off the business, but failed to find a buyer. It
then merged Modern Foods with itself. Recently, it gave Lazard India the
mandate of selling the popular brand and its distribution channels.
Sources said Switz, which operates in east India through a 51:49 joint venture
with Kolkata-based Arnab Basu, has lined up major plans for the country. It
already operates 105 outlets in Greater Kolkata with two factories and has set
up three other factories at Siliguri, Bhubaneshwar and Bangalore. Incidentally,
Mr Basu, a former HUL hand, is understood to have been instrumental in working
out the deal.
A senior investment banking official said HUL has chosen Switz from three
offers it received. “However, there is many a slip between the lip and the
cup,” he said.
When contacted by ET, HUL’s official spokesperson said, “We do not
comment on speculations.” Efforts to contact Taizoon Khorakiwala were
futile. However, senior Switz officials said they were in final round of talks
with HUL. Sources said HUL is not selling the plant and real estate as part of
the deal. It would also retain the manufacturing facilities.
ET had reported on November 5, 2007 that HUL had put Modern Foods on the block
and it had received three “acceptable” offers from strategic players.
In January 2000, Hindustan Lever (HUL’s earlier moniker) had turned out
to be the sol
e bidder for Modern Foods India Ltd. It paid Rs 105.45 crore, as per the
valuation exercise undertaken by its valuer ICICI, for 74% of the shares along
with an agreement to invest Rs 20 crore more in the troubled bread maker.
Subsequently, the government exercised its ‘put’ option to sell the
remaining 26% to HLL for Rs 44.07 crore on November 28, 2002. Since the
acquisition, HUL had been struggling with the bakery unit. High costs and an
unmanageable work force in the low-margin business had made it an
‘indigestible’ deal.
Senior HUL officials said the acquisition was a complete misfit with the HUL
culture and systems. The company had admitted that the acquisition was a
mistake on account of improper due diligence. “The failure of the business
is the result of a wrong strategy, a culture misfit and HUL’s inherent
lack of capability in handling the bakery business. To turn around a new
business calls for innovative ideas and an open mind which is completely absent
in HUL,” said a former HUL senior official, who worked in the foods
division.
Early in 2006, HUL had put the company on the block, but failed to clinch a
deal owing to valuation issues. Sources said bidders walked out because of
disagreements over the high valuations demanded by HUL for the loss-making
unit. Subsequently, in September 2006, HUL merged Modern Foods with itself,
after increasing losses rendered it a BIFR case.
MFIL’ product portfolio includes many kinds of breads including ones on
the health and wellness platform, bar cakes and bread rusks. The division has 6
manufacturing locations across the country—including Mumbai, Bangalore,
Chennai, Kochi, Kolkata and Hyderabad—and 40 franchisees.