Merger Was Only Way Out For Cash-Starved Mcleod

McLeod's cash flow problems provide the clue. In 1995-96, McLeod had a negative cash flow of nearly Rs 4.14 crore from its operating activities.

Interest paid was a major reason. It was only the sale of its investments that converted the negative cash flow into a positive one. Coupled by the proceeds of the issue of share capital to fund the Eveready takeover, the company was able to end the fiscal with a positive cash flow.

In contrast, Eveready Industries had a positive operating cash flow of Rs 30.91 crore in 1995-96, and it was able to use the extra cash to invest in inter-corporate deposits (net) amounting to Rs 34.24 crore. The merger would therefore solve McLeod Russel's cash flow problems.

 

But why should McLeod Russel, which made a public issue last year, face a cash crunch? The root lies in the price paid by McLeod for the acquisition of Union Carbide, since re-named Eveready. At Rs175 a share, this was an expensive acquisition. The present price of the scrip is around Rs 145. To enable the buying, the tea company raised funds by way of very short-term, zero percent, non-convertible debentures amounting to Rs 310 crore, which was repaid in 1995-96.

As on March 31, 1996, out of the rights and public issue of Rs 302 crore, the company received Rs 240.80 crore as share application money and call money with the rest Rs 62.02 crore shown as arrears.

With the money raised through the capital issue, McLeod Russel not only paid back the debentures but also increased loans and advances by around Rs.22 crore. The problem is that while the debentures were repaid, McLeod had to increase its unsecured loans sharply, and, as at end-March this year, the unsecured loans amounted to Rs 121.51 crore, compared with Rs 32.26 crore a year earlier. Of this, ICDs accountedom.inc"-->