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Affirmative Action for Turning Around a Company

Target firm

ABC Ltd. was established in the year 1960 as a Industrial Product company. The North India-based company later went into backward integration with specialty Base Metal manufacturing and acquiring mines. Over the years it continuously upgraded and diversified its product basket of Industrial Product as well as Base Metal business. Industrial Product business expanded in geography and the markets. Eventually, ABC Ltd. became the largest manufacturer of Industrial Product in India with a market share of over 60% and third largest in the world. However, Base Metal remained a small capacity business of just little over 1 Million tonne. The company has a global base of Industrial Product manufacturing, with facilities in India and outside India.

The company went public in 2XXX. It is listed on BSE, NSE and Luxembourg Stock Exchange.

At the peak it had a topline of over a Billion Dollars and at the point of distress it had a total debt in excess of over INR 5000 Crores. In fiscal 2019, the company reported total revenues in excess of INR 2000 Crores. The total debt of the company stood at INR 3000 Crores.

As of June 30, 2019, Promoter & Promoter Group held almost 50% of the total shares of the company.

Management and Board Structure

The company was governed by the Board of Directors, which was led by one of the promoters in the Non-Executive Capacity. Scion of the other promoter family was MD & CEO. The two CEO’s - one for Base Metal and the other Industrial Product business, were full time Executive Directors. In addition, there were two other Non-Executive Directors of the Promoter group. The company had seven Independent Directors. Thus, the Board consisted of three Executive Directors, three Non-Executive Directors including those of the promoter’s family and seven Independent Directors.

Decline phase

The company had a name as a well-run company until around 2010 before it fell in the financial challenges. The company failed to post results as per estimates citing various factors including sluggish overseas market, breakout of fire, temporary shutdowns and transport-related issues for several quarters. The company, however, almost doubled in capacity during the same time, stable expansion remained an issue. Net profits contracted due to higher interest cost and depreciation due to high capital expenditure.

Strategic Board changes and the transformation journey

For some time, bankers were uncomfortable with the leadership of the Board. Hence, after watching for a period, in the year 2017, the representative of the lenders (nominated by a leading PSU Bank) brought a proposal in the Board for the removal of the Chairman under the relevant provision of the Companies Act and with due notice. The proposition brought by the lender’s nominee Director was only to remove him from the Chairmanship of the Board and not the Directorship. The resolution was tabled in a duly executed Board Meeting with a specified agenda and applicable notice period. In the Board Meeting after the debate, the proposal was put to vote. Two Board members voted against the resolution, one member abstained from the voting and one Director did not attend. All these four were from the promoter family. All the Independent Directors, lenders nominee and the one remaining Executive Director voted in favour of the resolution for removal of the Chairman.

The transformation started immediately on the day of the removal of the earlier Chairman who continued to be the Non-Executive Director though. The entire process of complete transformation of the company happened in less than two years.

With the change of the Chairman, the dynamics of the Board was completely transformed. The Board meetings were very well coordinated and chaired now by the Non-Executive Chairman, who was an Independent Director supported by the team of the Independent Directors. Of course, within the framework of the Companies Act, LODR and other applications legislations.

Strategic plans implemented after the board restructuring

Divestment of profit-making Industrial Product business explored
The Board under the new Chairman immediately decided to sell one segment of the business. The Industrial Product, which was profit making and valuable was identified to be sold to pay off major part of the debt. The Committee of Independent Directors appointed by the Board looked for the Investment Bankers globally and a leading foreign Investment Banker was appointed. The reason for appointing an International Investment Banker was that the Industrial Product business did not have buyers in India even though there was a serious interest outside India. The Board was expecting a valuation in excess of at least Rs. 2000 Crores so that nearly half of the debt is paid off and the balance can be serviced with the improvements of the remaining business and cash was generated therefrom. The Board also appointed a Leading Global Management Consultant through the transparent selection process to help, improve in particular the performance of the Base Metal business. Both the processes – sale & improvements were run on concurrently. However, after six months it was realized that the offers that had come for Industrial Product business were below Rs. 2000 Crore.

Focus shifted to Base Metal business divestment – the transaction was completed in the first quarter of FY19
In the meantime, Base Metal business started looking up in India and the prices of the Base Metal went up. The transactions had started happening and there were likely buyers of Base Metal business within India. Hence, the Board without abandoning the process of the sale of Industrial Product (though it was kept on a low key) started the process of selling of Base Metal business. The Committee of Independent Directors through a very transparent process selected the two Investment Bankers within India to do the deal. The Board was anxious to finish the transaction as soon as possible because the company was likely to default in six months’ time.

Hence, the Board on the recommendation of the Independent Directors’ Committee took a bold decision to run only one stage process instead of two stages process of calling binding bids subject to due diligence. The Investment bankers worked hard and inspired the interest of several buyers. However, for value maximization and quick deal, the Board took another bold decision of accepting a pre-emptive bid from XYZ Ltd. for a sum in excess of Rs. 4000 Crores for Base Metal business with mines subject to adjustments for due diligence etc. The bid was opened, and it was found to be of great merit and was accepted by the Board.

On calculation given by the CFO and his team, it was observed that if the deal goes through, the company would pay off all short term and long-term debt and only a part of the working capital debt will remain on the book. The Board did not want the company to default and decided to conclude the transaction.

The Board meetings were conducted very professionally, and detailed minutes were recorded of all the meetings. The decisions of the selection of Investment bank, sale of Base Metal business and/or the Industrial Products business and actual transaction were decided a majority on vote with all the Directors except two Non-Executive Directors voting in favor of the decisions. The transaction is fully completed now, and the company has become debt free except for working capital.

Quantification of the Impact of ABC Ltd. transformation

  • Lenders and bankers have got their full money with up to date interest without a rupee of adjustment/waiver
  • Employees have become the employee of Tata Group
  • Government has received all its outstanding dues of all the types without any waiver or adjustments
  • The share price of the company which was hovering around to Rs. x scaled up to Rs. 5X by April 2019
  • The company became debt free with profits after tax from the remaining business.

Learnings for other corporates/banks out of the transformation journey of ABC Ltd.

The biggest lesson is that, in case, if the Board is run professionally by the members who have no self-interest, even most difficult situations can be navigated. The Independent Directors notwithstanding the challenges and the onslaught of various complaints to numerous agencies discharged their obligation to all the stakeholders impartially.

How can this transformation model be replicated?

This model can be replicated in any company in case if the Independent Directors take full charge of governance of the company and work fearlessly without any self-interest.