Rising From The Ashes

Circa 1998. Sitting in his office at the basement of Thapar House in New Delhi's Connaught Place area, Gautam Thapar, the joint managing director of Ballarpur Industries (Bilt), rues the day his company put its money into Phoenix Pulp & Paper Company, a Thai pulp producer based north of Bangkok. The paper (pulp is the main input for paper) cycle is at its lowest ebb, the south Asian currency crisis has taken its toll, and the company is in the news for all the wrong reasons: in-fighting amongst its shareholders. George Davison, Phoenix chairman and managing director and 38.5 per cent shareholder in the company, is involved in a bitter power struggle with the others including the Thapars who hold an 11 per cent stake through Bilt.

 

The young Thapar, who is trying to put his house in order by divesting all non-core investments, doesn't know what to do with the Phoenix shares. "Find a buyer? You must be joking. The shares aren't worth the paper they are written on," he says.

Fast forward to 2000. Thapar, who is now the Bilt managing director, is moving in to acquire control of Phoenix. He has appointed a foreign bank to talk to the other shareholders to acquire a 51 per cent stake in the company. "We want management control," says Thapar, the determination in his face a sharp contrast to the despondency of two years ago.

Things have changed pretty radically in Thapar's relationship with Phoenix, the group's first overseas acquisition. Davison is out of the company _ his name does not even feature on the company's board of directors or principal shareholders. And in paper industry circles, Phoenix is already being referred to as the latest feather in Thapar's cap. Phoenix is the largest pulp producer in Thailand _ and gives the Thapars a strong foothold for the Thapars in the far east.

Just what brought about the change? The story goes back almost two decades. Davison, a marine fighter pilot-turned-entrepreneur, had the licence to put up a grass-based (it actually came up as a eucalyptus-based plant) pulp plant in a backward region of Thailand with an annual capacity of 100,000 tonnes (later raised to 225,000 tonnes). His search for a low-cost technology supplier brought him to Bilt, India's largest paper company.

The Thapars, agreed to give the technology for a fee. Instead of paying Bilt the fees, Davison gave it a 32 per cent stake in Phoenix, which the Thapars agreed to since the group was on a diversification binge. Over the years, Bilt had to forego a number of rights issues because of restrictions imposed by the Foreign Exchange Regulation Act (Fera). As a result, its shareholding had whittled to 11.5 per cent by the mid-1990s. The company was being run by Davison and the Thapars had no say in the management.

In 1994, it was one of these rights issues that proved the flashpoint. The Thapars forefeited their share, which was picked up by Kirit Kumar Chimanlal Shah, a Thai national. Davison alleged that Shah was a frontman for a backdoor bid by the Thapars, and took his complaints to the Enforcement Directorate (ED) in the ministry of finance about possible Fera violations led to an inquiry by the ED.

On their part, the Thapars insisted that Shah was acting on his own. But this cut little ice with Davison. Consequently, in 1997, the Bilt nominee, chairman Lalit Mohan Thapar, and Shah were evicted from the company's board. This followed prolonged mud-slinging between the two estranged partners with each blaming the other of financial impropriety.

Then last year, Davison's suddenly lost his entire stake in Phoenix. What happened? Davison could not be traced for this article. But it is said that Davison raised money from a number of Thai banks to acquire more Phoenix shares by pledging his 38.5 per cent shares in the company. The margin money kept accumulating and finally Davison expressed his inability to repay. Consequently, these shares were taken over by the banks. Davison had to step down as chairman & managing director and he left Thailand.

Soon after the Thai currency meltdown happened and some of these banks _ which held 14 per cent Phoenix shares _ went into a tailspin. To resurrect these banks, the Thai Reconstruction Authority decided to auction these shares in November last year. An advertisement to this effect was put in the Thai papers.

A copy of this landed on Thapar's table in mid-November. He quickly weighed his options. The company's assets were good. Davison, his bete noire, was no longer in the picture. The paper cycle was on an upswing (pulp prices have improved by almost 100 per cent in the last one year). Almost 60 per cent of the executives are ex-Bilt employees. The ED inquiry had failed to come up with any evidence of wrong-doing on the part of the Thapars (a fact we checked with the directorate). And, last but not least, Bilt had the cash to acquire these shares. "With 11 per cent shares, we were nowhere. But with another 14 per cent, we could have moved into a position of strength," Thapar remembers. He decided to bid for the shares.

At the end of the aucton, he walked away with the shares at a cost of Rs 55 crore. Soon, his uncle Lalit Mohan Thapar was co-opted on the Phoenix board and reinstated as the vice-chairman of the company.

This was just the first step.

Early this year, another realisation seems to have struck Thapar. Bilt was the only shareholder with a paper manufacturing, all other shareholders in the company being financial investors. The second largest shareholder with a 19 per cent stake is the Thai Farmers Bank and the third is Vashdev Tikamdas Purswani, a Thai national who holds 15 per cent shares. This has made Bilt's position unstable, since investors can exit to book profits. (The share price of Phoenix, once blacklisted by the Thai bourses, had steadily been climbing _ from 19 baht to 29 baht now.) And if another promoter like Davison moves in, the golden goose could slip out of Thapars' hands. Hence, Thapar has decided to move in for a controlling stake.

There is another reason Thapar wants to up his stake in Phoenix quickly: it is expected to announce whopping dividends this year. The talk is doing the rounds that it will be nothing less than 35 per cent. On an equity capital of 1.1 billion baht, it works out to around 350 million baht or $90 million. As a 25 per cent shareholder, Bilt stands to get some $20 million (Rs 90 crore). "That goes straight to the bottomline," says Thapar with a grin. Therefore, if Bilt's stake goes up to 51 per cent before Phoenix closes its books for the year, the gain could be as high as $45 million (over Rs 200 crore).

Of course, Thapar will have to pay a price for harvesting such rich dividends. Under Thai law, if a shareholder acqires more than 25 per cent shares in a local company, it has to make an offer for all the other shares at the same price. "We are prepared for it," says Bilt chief financial officer B Hariharan.

Thapar may or may not get control of Phoenix, but ideas have started taking shape in his mind about what to do with the company. "A stand-alone pulp producer does not have much of a future. It needs to go in for a forward integration. And some paper plants in Thailand are available right now," says he. That will be Phoenix, Act Two.