Anders Povlsen, the man behind Danish clothing retailer Best Seller, along with existing promoters of Bombay Rayon Fashions Ltd (BRFL), have jointly made an open offer to minority shareholders of the fabric and apparel maker that may possibly take the total holding of the promoter & the persons acting in concert to as much as 92 per cent in the company. The open offer, if fully successful, will cost Povlsen around Rs 852.6 crore or $192 million, taking his total investment in the company to over Rs 2,000 crore or around $450 million, making it the biggest inbound deal for an Indian textile firm, according to VCCircle estimates.
Povlsen who privately owns Denmark’s Bestseller A/S – one of the world’s leading retail clothing companies that sells its products in 46 markets in Europe, the Middle East, Asia and Canada through 2,520 chain stores, of which 308 are situated in Denmark, and 12,000 external multi-brand stores – already has 14.07 per cent stake in Bombay Rayon Fashions. He acquired 20 per cent in the company two years ago that had been diluted to 14 per cent post further equity issue by the firm.
He also owns GDRs (without voting rights) that he is now converting into equity and it will give him 35.89 per cent direct equity stake after factoring in the warrants held by the promoters. The stake will be due for conversion by May, 2011. The existing Indian promoters Agarwal family will own around 37.2 per cent post-warrant conversion.
The open offer provision is triggered as Povlsen will cross the 15 per cent mark for the second time. Its earlier open offer (at Rs 185 per share) after investing in the company in early 2009, was a damp squib. It had later put in $92 million in November, 2009, and thereafter, another $99 million last October by subscribing to GDRs. As a result, Povlsen’s total investment in BRFL has gone up to around Rs 1,200 crore ($270 million). BRFL shares did touch a one-year high during the early trading hours on Wednesday and are currently quoted at Rs 278 each, around 7 per cent short of the open offer price of Rs 300 per share.
Investment Structure
What is interesting is the proposed holding structure of the shares, to be acquired in the open offer. All the shares tendered in the open offer will be acquired by a new company whose majority shareholders will be existing Indian promoters of BRFL or the Agarwals. Povlsen will acquire 40 per cent holding in this company and the entire fund required for the open offer will be brought in as equity investment by Povlsen to acquire this stake.
As per the new FDI norms, this will not be counted as a foreign investment. There is no ceiling on foreign investment in the textile sector but this deal could have been structured to ensure that Povlsen would not hold majority stake (directly and indirectly) in BRFL that is building a significant presence in the retail sector. Incidentally, the new norm of not counting the indirect holding of foreign investors in a company where the majority stake is owned by Indians is not applicable to multi-brand retail.
In April, 2008, BRFL had acquired the brand Guru and other retail business of Jam Session Holding S.r.l (Jam). Guru has around 15 retail outlets and 9 franchises spread across Europe (mainly Spain, Italy and the Netherlands), besides Dubai. According to the information displayed on its website, the company has also expanded Guru in Mumbai, New Delhi and Shanghai.
It might be the expansion of this business that did attract Povlsen to BRFL. Although Bestseller had Indian operations as a purchasing point for apparel, the group had also launched stores of its few brands in the country in the recent past.
Bestseller that operates through brands such as Vero Moda and Jack & Jones in the casual wear segment in India, has been looking to open new stores for its other global labels. It is not clear in what ownership format are these stores run, given restrictions on retailing in the country.
The government allows 51 per cent foreign ownership in single brand retail chains in India.
Management & Holding Structure
The BRFL management had said in the past that it was a financial investment and Povlsen would not get management control. The new holding structure will also ensure this. But what may be tricky is the minimum public holding norms for the listed firms in India.
Povlsen Group firms have said that they would like to be recognised as one of the persons acting in concert with existing promoters. And even before the open offer, together they will own around 73 per cent stake, just short of the 75 per cent mark, the maximum they can own.
However, if the open offer is fully successful, the promoter and the promoter group (including Povlsen) will own over 90 per cent stake, at which point they can potentially go for a delisting. Is that the ultimate game plan?
Povlsen’s China-India bet
In many ways, Povlsen’s India moves look similar to his strategy in the world’s fastest growing major economy China. He formed a JV (in his personal capacity) with two other Danish professionals with a China experience in mid-90s and has had a very successful venture in mainland China.
This is even as Bestseller has no ownership interests in the production chain but co-operates with selected suppliers primarily in China, India, Bangladesh, Turkey and Italy through own buying offices.
Povlsen has taken over the reins of the company a decade ago (and the majority stake from his father who founded the company) and has been furiously expanding operations of the firm. In its financial year ended July, 2010, Bestseller opened 474 new stores globally.
The company closed the last financial year (2009-10) with revenues of €1.9 billion with the net profit around € 362 million. Bestseller had grown its revenues and gross profit even during the peak of economic slowdown in the West, even as its profitability was affected during 2008-09.