Takeover scare for McLeod Russel as Carbon Resources picks up over 5% stake

The would-be acquirer makes non-binding offer to banks to settle the bulk tea producer's dues

McLeod Russel, the largest bulk tea producer in India, is facing a takeover threat from Carbon Resources, a company manufacturing input materials for ferro alloys, aluminium and steel industries.

In a surprise move on Friday, Carbon Resources bought more than 5 per cent stake in McLeod from the open market. On the same day, it made a non-binding offer to McLeod’s lenders – in the middle of a debt resolution process – for a one-time settlement of dues.

“We sent a non-binding letter of intent (LoI) to the bankers of McLeod on Friday, saying that we would like to settle the loans by making a one-time payment,” said Abhinav Jalan, director, Carbon Resources. “The intent is to take over the company,” said Jalan.

With a holding of 6.25 per cent as of June-end, the Khaitans, the promoters of McLeod, are in a spot.

Carbon Resources is understood to have indicated in the LoI that it would be taking a controlling stake in McLeod and changing its management and board.

According to estimates of Carbon Resources, McLeod’s outstanding bank debt is Rs 1,650 crore. It has made an offer of Rs 1,245 crore, which includes equity capital infusion of Rs 300 crore. It has proposed full payment to the secured lenders and the balance to the unsecured lenders.

Carbon Resources bought about 4,950,000 shares on the NSE and another 300,000 shares on the BSE on Friday, translating to 5.03 per cent of McLeod’s issued share capital. The disclosure was made to the stock exchanges on Monday.

The McLeod stock has hit the upper circuit in the last two trading sessions, rising about 44 per cent. On Monday, it closed at Rs 34 per share on the BSE.

Carbon Resources is one of the largest producers of electrode paste, an essential material for making ferro alloys. It also manufactures calcined petroleum coke for the aluminium, steel and graphite electrode industry.

Explaining the rationale behind the McLeod move, Jalan said, “We are a carbon company. We are also into commodity trading and we are looking to diversify.”

“This is a number one company in tea with an asset-backed business, and we believe we can bring value to it because over the years, the company has been shrinking due to sale of assets,” added Jalan.

Sources in McLeod, however, pointed out that tea was a difficult business and a non-tea player taking charge of such a large tea company could create problems for the sector. “About 70,000 workers are associated with the company,” a source said.

With 31 estates in Assam and two in Dooars, McLeod Russel India is the country’s largest bulk tea player with a crop of 44 million kg (mkg). The total group production is around 73 mkg across India, Africa, and Vietnam.

McLeod has been in troubled waters for a while now. It ran into debt while extending support to group firm McNally Bharat Engineering Company. To pay off the lenders between 2018-19 and 2019-20, it sold off about 18 gardens and realised close to Rs 800 crore.

Currently, the Khaitans are in discussions with the lenders for restructuring the debt. The lenders appointed independent professionals for carrying out a techno economic viability study (TEV), which was re-vetted and confirmed. The valuation of tea estates is under process.

Jalan made it clear that as part of the debt resolution, no more assets would be sold. A meeting with lenders to discuss the proposal is understood to have been sought. There are about 10 banks in the consortium and ICICI Bank is the lead bank.

No discussions have been held with the Khaitans by the Carbon Resources management.

For the Khaitan family, which recently lost control of Eveready to the Burmans, this is yet another setback.