Endgame at McLeod Russel amid risk of losing control of last major asset

With two rival bids, the once powerful group that owns the world's largest tea producer is in danger of losing control of its last major asset

The dust had just settled on the transition at the country’s largest dry cell battery maker, Eveready Industries India. The control passed from the Brij Mohan Khaitan group, to the Burman family — promoters of Dabur India — in July. And the storied business house of Kolkata was focused on thrashing out a debt resolution plan with the banks to save its lone crown jewel, McLeod Russel India, the country’s largest bulk tea producer and one of the world’s largest.
 

As the debt resolution process dragged on, Suresh Jalan-owned Carbon Resources Private Ltd entered the scene. The relatively under-the-radar company, which manufactures inputs for ferro alloys, steel and aluminium industries, raised a proverbial storm in the tea cup when it picked up a 5.03 per cent stake in McLeod Russel on September 16 from the open market. On the same day, it approached McLeod’s bankers with a non-binding letter of intent (LoI) to settle dues and take a controlling stake in the tea producer.
 

The Jalans proposed to pay secured lenders in full and 55 per cent of principal amount to unsecured lenders. Having ridden the commodity boom over the past year, the group is looking to diversify; McLeod would make it the largest player in bulk tea in India in one shot.
 

But within days, McLeod’s lenders received a counter-proposal — this time from M K Shah Exports, India’s largest producer of the orthodox variety of tea from Assam.
 

M K Shah’s plan stands in contrast to the Jalans’ in more ways than one. The former is interested in buying select tea gardens and helping with the debt resolution process, whereas the latter wants to acquire the company. Also, Shah doesn’t want to keep the Khaitans out of McLeod.
 

Amid the offer and counter-offer, the Khaitans are pinning their hopes on the debt restructuring plan that has been in the works for more than two years.
 

At the McLeod Russel AGM on Friday, Aditya Khaitan, chairman and managing director, told shareholders that banks had come to a conclusion on the debt restructuring resolution and clearances from the rating agencies were awaited. He hoped that banks would extend support through “this difficult period”.

The debt restructuring is being done under Reserve Bank of India (RBI) guidelines and McLeod would need independent credit evaluation of the residual debt by two rating agencies; favourable ratings would green-light the debt resolution.

But the offers to McLeod’s banks have queered the pitch, and what they decide would pave the future course for McLeod and the Khaitans.
 

In the tea industry, McLeod holds sway with 44 million kg (mkg) across 31 estates in Assam and two in Dooars. The total production is about 73 mkg across India, Africa, and Vietnam.
 

But the Khaitans’ hold on the asset, at 6.25 per cent, is precarious. Equity infusion as part of the debt recast plan would shore up the holding “substantially”, sources in McLeod pointed out.
 

It may also look at roping in a financial investor, but the Khaitans wouldn’t want control of McLeod to slip away like Eveready. After all, it’s the last big asset that the business family controls.
 

Not so long back, it used to be one of the largest corporate groups in Kolkata. The story of Brij Mohan Khaitan, Aditya Khaitan’s father, is dramatic. His entry into the world of tea started with supplying packaging materials and fertilisers to Williamson Magor & Company, one of India’s top British-owned managing agency firms, in its time.
 

In 1961, when one of the Magor tea companies, Bishnauth, was close to becoming a target for a hostile acquisition, Khaitan was brought in as the white knight. In 1963, he was invited to join the board of directors and eventually became the managing director in 1964.
 

Since then and over the next 30 years, with a string of acquisitions, Khaitan built an empire. According to Gita Piramal’s Business Maharajas, by 1995, the group consisted of 25 companies with interests apart from tea in batteries (Eveready Industries, Standard Batteries), engineering (Macneill Engineering, McNally Bharat, Kilburn Engineering, Worthington Pumps, Deutsche Babcock), packaging (India Foils) and financial services (Williamson Financial Service).
 

But between early and mid-2000, the important businesses in the portfolio were tea (consolidated under McLeod Russel), batteries (Eveready), and engineering (McNally Bharat Engineering and Kilburn Engineering). They have had a fair share of twists and turns.
 

In 2001, the Khaitans and Magors split after a partnership spanning decades. With it went some of the best estates and a sizable slice of production from the group portfolio. But four years later, the Khaitans bought Magor-held Borelli Tea Holdings UK, taking over 17 estates of its Indian subsidiary, Williamson Tea Assam.

Acquisitions followed in India and abroad that took McLeod’s production to 117 mkg in 2015-16. But trouble started brewing around 2018 on account of financial support extended to the ailing McNally Bharat.
 

Supporting the engineering outfit by way of loans and advances that it couldn’t repay landed Eveready and McLeod in trouble. Promoter shares were pledged to borrow funds for McNally. As pledge-holders sold shares, promoter holding slipped in the companies.
 

Last year, the National Company Law Tribunal admitted an application by a financial creditor of McLeod for insolvency proceedings. But the promoters settled with the creditor and the application was withdrawn.
 

Debt has been a recurring problem with the group, said a former group official. “But the positive is that till the very last they try to honour financial commitments,” he added.
 

To pare debt, between FY19 and FY20, McLeod sold about 18 gardens, mostly in Assam, and realised close to Rs 800 crore. The company also sold the profitable operations in Rwanda.
 

In the last two years, the company managed to reduce some debt from its cash flows, sources said. The focus for the Khaitans right now is resurrecting McLeod and retaining hold on the company.
 

That would be important because the Khaitan state of affairs is like this: in Eveready, the Burmans are promoters of Eveready and in control with a 38.37 per cent stake — the Khaitans hold 4.84 per cent as of June (though they are still classified as promoters); McNally Bharat is undergoing insolvency proceedings; Kilburn went through debt restructuring in FY21 and there is a change in management with investment company, Firstview Trading, becoming the largest shareholder — the Khaitans are joint promoters with more than 20 per cent holding.
 

And with the Shahs and Jalans vying for it, the McLeod Russel story is still brewing.