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The stake sale was not entirely unexpected. Over the last couple of years, in a bid to increase its global footprint, Godrej had embarked on a shop-till-you-drop exercise across Asia, Africa and Latin America.
It recently acquired 51 per cent in the Darling group in Africa. Before that it had picked up stakes in Tura, a medicated brand in West Africa, Megasari Group, a household care company in Indonesia and in two hair colour companies in Argentina, Issue Group and Argencos. Add to that the Keyline Brands in the United Kingdom, Rapidol and Kinky Group in South Africa, acquired some years back, and GCPL was saddled with a huge shopping bill.
The tab in this case was a Rs 2,500 crore debt (Rs 2,005 crore as of March 2011) that GCPL had accumulated in its quest to turn into a global player. That, in turn, weighed heavily on the balance sheet with GCPL having a debt to equity ratio of 1.16:1 as opposed to consumer goods industry peers like Dabur and Marico who have a debt to equity ratio of 0.90 and 0.84, respectively.
Hence to shed some of its bad cholesterol, GCPL looked at an investor in Baytree. "Temasek's focus geographies match very well with our global 3 X 3 strategy (three categories and three continents)," GCPL Chairman Adi Godrej said in a statement. He added that while GCPL would stay focussed on implementing its global strategy, it will not be at the cost of operational and financial discipline. "This investment will ensure that we continue to have a strong balance sheet," he said. The Baytree deal will not just positively aid the debt to equity ratio, but also lower interest costs, points out Abneesh Roy, associate director, Edelweiss Financial Services.
What prompted GCPL to an equity sale instead of exploring capital raising options like a qualified institutional placement (QIP)? P. Ganesh, CFO, GCPL says that Baytree's offer was a good deal as GCPL got a premium (Rs 410 per share when the stock was trading at Rs 403 when the deal was approved). Also, GCPL had to concede no special rights and provide no board position to Baytree, something that the company would have had to probably offer if an institutional investor entered through the QIP route.
With more money in its books, GCPL is not going to sit tight and make its books look healthier. Almost immediately after the company spelt out the details of its Baytree deal, it announced that it had entered into an agreement to acquire a 60 per cent stake in Cosmetica Nacional, a hair colour and cosmetics company in Chile that had a turnover of roughly Rs 180 crore. The value of the deal was undisclosed.
(This story was published in Businessworld Issue Dated 06-02-2012)