Global PE majors Blackstone, KKR, Apax and TPG Capital have joined Advent and Temasek-backed Crompton Greaves Consumer in the race to acquire a controlling stake in Eureka Forbes, the country’s largest maker of water purifiers and vacuum cleaners, said people aware of the development.
Preliminary discussions are currently on between the potential suitors and the Shapoorji Pallonji Group for a possible transaction, these persons said, adding that the talks centre around sale of control or an outright takeover.
What has compounded the urgency for a stake sale is the liquidity troubles of the SP Group and the latter’s need to pay off the debt raised from listed arm Sterling & Wilson, these persons added.
On Tuesday, Forbes & Company — SP Group’s listed unit — informed exchanges that it planned to unlock the value of its 100% holding in Eureka Forbes through an initial public offering, stake dilution/ sale or a combination of the three. It told the exchanges that the company’s board had empowered the management to evaluate “appropriate mechanisms” for an eventual listing of Eureka Forbes. The company did not share details. Since the announcement, Forbes & Co’s shares have risen 37% in three trading sessions.
Sources aware of the developments said an IPO appears difficult in the current environment, especially after the controversy over SP Group’s delay in repaying debt raised from Sterling & Wilson, the conglomerate’s listed solar EPC unit.
The Pallonji family — which bought the business from the Tatas almost two decades ago — estimates the value of Eureka Forbes at Rs 5,000-6,000 crore. The final contours of a deal are expected to evolve as the process gains momentum.
Standard Chartered Bank and Nomura are believed to be getting ready to launch a formal sale process. Feelers have also gone out to Hindustan Unilever, which has a competing water purifier brand (Pureit), ITC and a few other consumer appliances and water and beverage companies.
Mails sent to Eureka Forbes and ITC did not elicit any response till press time Thursday. The spokespersons for KKR, TPG, Blackstone, Advent, Temasek, HUL and Haier India declined to comment.
Analysts said other than financial institutions, the sale is also likely to draw the interest of domestic and global players such as Havells, Haier, Kent, LG and even new players like Xiaomi. The transaction would be structured similar to what Crompton Greaves did, which hived off its consumer electricals business and sold it to a consortium of PE funds led by Advent and Temasek.
Eureka Forbes – with one of the world’s largest direct sales force — has presence in water and air purification, vacuum cleaning and home security solutions segments. With 20 million customers across 35 countries, it was among the earliest movers in its business segments. However, increasing competition, lack of focus, a heightened cost structure and negligible capital investments resulted in the company losing market share to local and global players in both the mass and premium segments.
FAILED EXPANSION PLANS
To make matters worse, Eureka Forbes’ attempts at global expansion through an acquisition in Switzerland boomeranged with the management being forced to restructure the business and write off two significant investments across Europe and Asia. The company is now believed to have roped in The Boston Consulting Group to help reduce costs and overhaul operations.
A company statement said Eureka Forbes is the market leader in the vacuum cleaner category, with an 89% market share in the country. It also controls about 55% share of the electrical water purifiers market. The company clocked consolidated revenues of Rs 2,388 crore in FY19 and an Ebitda of Rs 78.04 crore. The projected Ebitda for FY20 and FY21 is Rs 160 crore and Rs 280 crore, respectively. The management is eyeing a valuation of over 20 times the Ebitda for FY21 — comparable to other transactions in the space in recent years. However, some observers believe such premium valuations could be a potential deal-breaker.
Eureka Forbes’ revenue grew at a CAGR of 2.6% in the past five years, according to Veratech Intelligence, which analysed the company’s financials.
“It’s a great brand that has been orphaned for long and mismanaged, which can be potentially turned around and can create significant value. Today, margins are in single digits and growth is stagnant,” said a potential investor, who has been approached.
“EFL (Eureka Forbes) on standalone basis continued to support Lux International AG (the Swiss arm) financially during FY19 even as its profitability remained subdued. On a consolidated basis, EFL had witnessed a decline in operating performance in FY18 owing to weak operating performance of Lux International due to unfavourable market conditions in Europe and impact of demonetisation and implementation of GST in the Indian entity,” CARE said in October. The ratings agency had revised the outlook to ‘negative’ owing to weak demand outlook in the industry, lower-than-estimated operating performance and moderation in the credit profile of the SP Group.
Source: Economic Times