Is sheer size the biggest hurdle in the NCLT route for McLeod Russel?

Viability of the tea industry is another factor that is holding back companies from bidding for India's largest tea company

Three financial creditors — YES Bank, Techno Electric & Engineering and IL&FS Infrastructure Debt Fund — have moved the National Company Law Tribunal (NCLT) against B M Khaitan group company, McLeod Russel India.
 
The financial creditors have moved the tribunal under Section 7 of the Insolvency and Bankruptcy Code (IBC). The section allows a financial creditor to initiate corporate insolvency resolution process of a corporate debtor in the event of a default.
 
McLeod has not been admitted to NCLT yet and hearings have been scheduled next month. It is possible that a settlement will be reached or a debt restructuring plan being discussed with a section of financial creditors will work out. But if admitted and a process for change of control under IBC is initiated, there are unlikely to be many takers for a company its size.  

 

McLeod, which happens to be India's largest tea company, has a volume of 55-58 million kg in India even after it sold 21 gardens in FY2019 and Q1 FY2020 to pare debt. Overseas operations make an additional 26 million kg, taking the consolidated production to 81-84 million kg.
 
Legal sources said even if the NCLT admits insolvency petitions against McLeod, the international subsidiaries will not be impacted.
 
Most industry players said that established players were not likely to bid for the entire lot of gardens. Some had already bought from McLeod.
 
A tea industry owner also said the viability of the industry was making survival difficult. The tea company has sold 7-8 gardens in the last one year.

 
Amalgamated Plantations from Tata Global Beverages is the second largest tea company in India, after McLeod.
 
Asked if Tata Global Beverages would consider expansion of its tea plantations business, a spokesperson said, it had no plans currently. Tata Global Beverages has interest in tea plantations via its two subsidiaries – Amalgamated Plantations (in Assam and West Bengal) and Kanan Devan Hills Plantations Company (in southern India).
 
Hindustan Unilever (HUL) too said, it had quit the tea plantations business in India. Asked if it would be interested, a company spokesperson said it doesn’t give any guidance on the future. During 2012-13, HUL, then Hindustan Lever, had exited the tea plantations vertical in India as it was “non-core” to the company’s India strategy. Incidentally, its Doom Dooma Tea Company was acquired by McLeod.

 
However, in the recent sale of gardens, it sold some estates from Doom Dooma to M K Shah Exports last year.
 
Both TGBL and HUL are focused on tea retailing. Goodricke Group, which bought two prized estates from McLeod in 2018, is also not keen on a full takeover.
 
“We have plans of scaling up our production but acquisition of tea estates is complete and we are not looking at further acquisitions. As such, we are not interested in McLeod for a full takeover,” said Atul Asthana, CEO and managing director at Goodricke Group. Goodricke’s parent, Camellia Plc incidentally, is the world’s largest private bulk tea producer.

 
The lack of interest in taking or increasing exposure in plantations from these tea majors might be because of the ongoing stress on the tea plantations business where prices have been unremunerative. In fact, industry officials said that while the cost of production has increased by 15-20 per cent in the last three years, tea prices increased by just 5-7 per cent thereby creating a serious imbalance in the trade.
 
Not just McLeod, but other tea plantation firms too have been selling estates because of financial stress. For instance, recently, Warren Tea sold its Sealkotee tea estate in Assam for Rs19 crore to pare debt. The sale of other estates is likely.

 
Dhunseri Tea Industries, which is looking at expansion and had bid for acquiring Assam Company (India) last year, via the insolvency process is yet to make up its mind. “I am known to be a buyer and may be interested, but our board will take a call. The decision may be in favour of bidding for McLeod or may not be so,” C K Dhanuka, managing director of Dhunseri, said.
 
The last time a prominent tea company went through the insolvency process was when Assam Company was auctioned last year. The deal fetched Rs1,214 crore from Abu Dhabi-based BRS Ventures, which outbid its nearest Indian competitor by nearly three times. Lenders took a 20 per cent haircut over their total claims, including interest, but operational creditors and workers received 100 per cent of their claim.

 
However, Assam Company had about a fifth the production volume of McLeod and additionally it also has some oil reserves. In its case, too, there were 14 companies initially which were interested in buying Assam Company but ultimately only four submitted bids, of which only two were into tea plantations. Both of them lost.
 
Some sources associated with McLeod developments said, if an Indian firm may not be interested in full-fledged purchase of McLeod, there could be investors from abroad as was in the case of Assam Company.