Acquisition of Sylvania SLI : Post
merger analysis

Project report for Mergers, Acquisition and Corporate Restructuring
Acknowledgement
We take this opportunity to express our profound gratitude to the people who have been instrumental in the...
Table of Contents
Acknowledgement............................................................................................
1. Executive Summary
In April 2007, Havells bought over the worldwide lighting business of the struggling Sylvania (1.5x H...
2. Introduction
Electricals Industry snapshot:-

5
Havells India:Havells India Limited is an electrical and power distribution equipment manufacturer with products ranging f...
PERFORMING METRICS (THOMSON ONE AS ON
30/06/2013)

03/31/13
(A)

03/31/14
(E)

03/31/15
(E)

Enterprise Value/Sales

1.2

...
GTE Sylvania contributed to the technological advancement of electrical distribution products in the late 1970s with
sever...
The main market of Havells – India then was punctuated with increasing imports of commoditized bulbs and lighting
instrume...


Anti monopolistic and anti trust issues in UK, USA, Germany, France etc :

In 2007, the world’s lighting market was dom...
Havells in EU FTC filings. This was most probably a shell company incorporated for tax purposes. (The actual ownership
has...
Return On Net Worth(%)

40.31

38.71

46.43

17.38

-26.15

23.94

39.23

35.95

35.2

Adjusted Return on Net
Worth(%)

26...
Cash Earning Retention
Ratio
AdjustedCash Flow Times

77.96

80.53

90.17

82.14

86.35

92.15

85.84

88.96

90.31

1.68
...
7. Warburg Private Placement:Havells issued 4.1m equity shares to Warbug Pincus at Rs625/share, aggregating to Rs2.6b, whi...
About Warburg Pincus:
Warburg Pincus is a leading private equity fund that is active in India. It has investments of moret...
The global financial crisis led to the slowdown in the consumption and construction activities in the key geographies of
S...
Management indicated that it would sell Sylvania’s receivables (factoring) and pay back part of the outstanding debt.
This...
Sylvania's products were priced 15 per cent lower than those of rivals Philips, Osram and GE. This was of little
help to S...
Across business units on a consolidated basis (excluding Sylvania), a sustainable cost structure can be broadly
represente...
• Volume growth in Europe remained muted but pricing was stable; Sylvania had a price hike in line with other
industry pla...


Product Complementarities:

The most remarkable thing about the acquisition was the fact that the acquisition resulted ...
10.

Comparative Valuation with peers after merger

11.

Transaction comparables

M&A deals in the consumer electricals se...
12.
1)

2)
3)
4)

References
Economic Times : Havells Sylvania with a new beginning; By Vikas Kumar, ET Bureau | 18 Jul, 2...
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Havells acquisition and turnaround of Sylvania - A comprehensive analysis

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A comprehensive analysis of one of the most comprehensive acquisition and turnaround of marquee brand Sylvania and massive restructuring efforts that it undertook to turnaround Sylvania

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Transcript of "Havells acquisition and turnaround of Sylvania - A comprehensive analysis"

  1. 1. Acquisition of Sylvania SLI : Post merger analysis Project report for Mergers, Acquisition and Corporate Restructuring
  2. 2. Acknowledgement We take this opportunity to express our profound gratitude to the people who have been instrumental in the successful completion of this project. We want to express deep regards to our guide Ms. Puja Agrawal for her exemplary guidance, monitoring and constant encouragement throughout the course of this assignment. Without her encouragement and guidance this project would not have materialized. We are grateful for the constant support and help. 2
  3. 3. Table of Contents Acknowledgement........................................................................................................................................................... 2 1. Executive Summary ........................................................................................................................................ 4 2. Introduction .................................................................................................................................................... 5 3. Merger rationale for Havells:-.......................................................................................................................... 8 4. Merger rationale for Sylvania:- ........................................................................................................................ 9 5. Deal Structure:- ............................................................................................................................................. 10 6. Warburg Private Placement:- ........................................................................................................................ 14 7. Post merger Analysis:- ................................................................................................................................... 15 8. Performance of the merged entity ................................................................................................................ 18 9. Comparative Valuation with peers after merger ............................................................................................ 22 10. Transaction comparables .............................................................................................................................. 22 11. References .................................................................................................................................................... 23 3
  4. 4. 1. Executive Summary In April 2007, Havells bought over the worldwide lighting business of the struggling Sylvania (1.5x Havells India revenues) from three private equity players for EV of Eur 200mn. Sylvania had already become cash flow positive in FY10 owing to successfully completion of one of the two restructuring programs initiated by the company in 2009. The management’s aggressive approach of pruning down fixed cost base through increased outsourcing and renewed focus on emerging markets would enable Sylvania to breakeven in FY11E and record healthy profits in FY12E. Aggressive Restructuring plans to enable raising margins from negative in FY10 to 8% in FY12E – Sylvania started making positive EBITDA of 5% from Q4 FY10 onwards as the some part of the Phoenix program started flowing in. The second program, Prakram completed by December 2010. These programs would rein in high fixed cost base and generate benefits to the extent of Eur36mn annually. Hence, belying even at the most conservative estimate of flat sales growth, the EBITDA touched Eur36mn in FY12E from loss of Eur2.8mn in 2008. Havells acquired Sylvania global business (except for brand rights to North America,Mexico, Australia and New Zealand) in for an enterprise value of €227MM. HAVL’s stock de-rated following the acquisition on account of concerns pertaining to losses in Sylvania. HAVL put a restructuring program in place to turn around Sylvania’s operations. As a result, Sylvania has recently broke even and we expect margins to improve going forward. A sustained improvement in Sylvania’s profitability boded well for HAVL valuations and will drive a stock re-rating. The most visible aspect of the acquistion was the fact that SLI was then the world's fourth-largest lighting company and 1.5 times bigger than Havells. It took the founder chairman Mr. Qimat Rai Gupta minutes to make up his mind about buying it, while his senior management - including son Anil Rai Gupta, nephew Ameet Gupta and Group CFO Rajesh Gupta - were still weighing the pros and cons. Havells had a track record of five successful acquisitions, and high growth in its Indian operations. In 1983, it bought the loss-making Delhi-based Towers and Transformers Ltd and turned it around in a year. Between 1997 and 2001, Havells also bought ECS, Duke Arnics Electronics, Standard Electricals and Crabtree India. The last was a 50:50 joint venture between Havells and the UK-based Crabtree, and Havells later acquired Crabtree's stake in the JV. India revenues had a compound annual growth rate of 50.08 per cent between 2002/03 and 2007/08. In March 2007, Havells bought Sylvania. And then the global financial crisis struck. As the meltdown rocked European markets, Sylvania's sales fell, leading to net losses of Euro 16.3 million in 2008/09 and Euro 26.1 million in 2009/10. From Euro 515 million in 2007/08, revenues dropped to Euro 438.4 million in two years. Havells's top management drew up an 18-month restructuring plan. In the first phase, called Phoenix (January to September 2009), the aim was to improve profitability by cutting manpower costs and closing factories. The second phase, called Prakram (September 2009 to June 2010), focused on further reducing the headcount, and increasing the sourcing of products from low-cost locations such as India and China. This deal is one of the boldest in Indian scenario because of the fact that it was funded mostly by debt, to which Indian equity as well as credit markets are generally hostile. The fact that Havells were able to renegotiate the debt covenants in the middle of one of worst financial crisis in the history, to their advantage; securing a god-send and strategically important private placement from Warbug Pincus so that they can pay their bridge loan for the renegotiated covenants. The restructuring deal also involved a complete and comprehensive management change and brilliant achievement in terms of cost synergies (~20% on an annualized basis in FY2009-12: HSBC Research) as well as clear merger rationale in terms of long terms objectives. 4
  5. 5. 2. Introduction Electricals Industry snapshot:- 5
  6. 6. Havells India:Havells India Limited is an electrical and power distribution equipment manufacturer with products ranging from Industrial and domestic circuit protection switchgear, cables, motors, fans, power capacitors, compact fluorescent lamp (CFL) lamps, and luminaries for domestic, commercial and industrial applications, modular switches, water heaters and domestic appliances covering the entire range of household, commercial and industrial electrical needs. The Company operates in four segments: Switchgears, Cable, Lighting and fixtures and Electrical Consumer Durables. The Company along with its subsidiary companies owns brands, such as Crabtree, Sylvania, Concord, Luminance, Linolite and Standard. Its manufacturing facilities are located at Faridabad in Haryana, Alwar and Neemrana in Rajasthan, Haridwar in Uttarakhand, Sahibabad and Noida in Uttar Pradesh and Baddi in Himachal Pradesh. The Company has introduced new generation series, Cosmic Star, in Controlgear segment. 6
  7. 7. PERFORMING METRICS (THOMSON ONE AS ON 30/06/2013) 03/31/13 (A) 03/31/14 (E) 03/31/15 (E) Enterprise Value/Sales 1.2 1.4 1.3 Enterprise Value/EBITDA 9.6 14.5 12.6 11.0 16.8 14.4 Total Debt/Enterprise Value 0.1 - - Total Debt/EBITDA 1.1 1.6 1.4 EBITDA/Interest Expense 7.8 7.2 8.3 EBITDA-Capital Expenditures/ Interest Expense 6.3 5.8 6.9 EBIT/Interest Expense 6.9 6.2 7.3 13.8 21.4 18.4 - 1.1 1.3 1.1 1.3 1.2 Price/Cash Flow 12.1 21.1 17.8 Price/Book Value 5.6 5.8 4.7 Enterprise Value/EBIT Price/Earnings PEG Price/Sales Sylvania SLI:Sylvania started when its predecessors Hygrade Sylvania Corporation when NILCO, Sylvania and Hygrade Lamp Company merged into one company in 1931. In 1939, Hygrade Sylvania started preliminary research on fluorescent technology, and later that year, introduced the first linear, or tubular, fluorescent lamp ever made. Sylvania was also a manufacturer of both vacuum tubes and transistors.In 1959, Sylvania Electronics merged with General Telephone to form General Telephone and Electronics. Through merger and acquisitions, the Company became a significant, but never dominating supplier of electrical distribution equipment, including transformers and switchgear, residential and commercial load centers and breakers, pushbuttons, indicator lights and other hard-wired devices. All were manufactured and distributed under the brand name GTE Sylvania, with the name Challenger used for its light commercial and residential product lines. 7
  8. 8. GTE Sylvania contributed to the technological advancement of electrical distribution products in the late 1970s with several interesting product features. At the time, they were the leading supplier of vacuum cast coil transformers, manufactured in their Hampton, Virginia plant. By 1981 GTE had made the decision to exit the electrical distribution equipment market and began selling off its product lines and manufacturing facilities. The Challenger line, mostly manufactured at the time in Jackson, Mississippi was sold to a former officer of GTE, who used the Challenger name as the name of his new company. Challenger flourished, and was eventually sold to Westinghouse, and later Eaton Corporation. In 1993 GTE exited the lighting business to concentrate on its core telecomm operations. The European, Asian and Latin American operations are now under the ownership of Sylvania. With the acquisition of the North American division by Osram GmbH in January 1993 Osram Sylvania Inc. was established. Osram acquisition resulted in portfolio rationalization for Sylvania which as then limited to include incandescent light bulbs, compact fluorescent lamps, light-emitting diode systems and other lighting products and services. Sylvania is among several established American brands that are licensed to global consumer electronics manufacturers. In 2002, due to failed restructuring efforts and the fact that Sylvania was left with burden of debt, Sylvania applied for bankruptcy petition for its European lighting division. A Private Equity consortium of DDJ Capital, Cerberus Capital Management and JP Morgan Securities took control of the company in 2002. In 2007, the world’s lighting market was dominated by four players - Sylvania, GE, Philips and Osram, each of whom had roughly a quarter of the market. With an outright takeover by any one of the other three likely to run afoul of competition laws in different markets, Sylvania was split into two. Havells decided to acquire the Europe, Asia and South America rights to the company for €227 million, while the North American operations were bought by Osram. According to estimates by Frost and Sullivan Sylvania has trailed the lighting market in Europe at 4.7% share, behind Philips (26.7%), Osram (21.4%), Megaman (13.3%) and GE (9.1%). % sales in fixture in Europe (2007) Philips Osram Megaman GE Sylvania 3. Merger rationale for Havells: Global branding power of Sylvania: Established professional and consumer lighting brands, manufacturing facilities across Europe, Latin America and Africa and a strong network of over 10,000 distributors and dealers across the world, Sylvania had immense distributor reach. If Havells was going to concentrate on new markets like South America as well as entrenching its position in its dominant Asian portfolio, it needed a wide distribution reach.  Consolidation of supply chain: 8
  9. 9. The main market of Havells – India then was punctuated with increasing imports of commoditized bulbs and lighting instruments for residential and commercial spaces from China, especially after the implementation of Bilateral Trade Agreement which made lighting and fixture a positive tradable item between India and China in 2005. The acquisition would help them leverage new production bases for these products in India and Brazil while premium products where Havells had no presence would be available for them in Europe  Vertical consolidation up the value chain: The acquisition of Sylvania would give Havells a foothold in the fixtures and Energy efficient markets in Europe where they had no earlier expertise and depended on imports from Europe itself even for the smaller market in India. There will be a thrust on emerging technologies such as CFL and LED that address energy and environmental issues . The European market for energy efficient lighting in Europe was $930 million in 2007, of which CFLs alone were $883 million. This market is expected to touch $1.6 billion by 2014, estimated Frost & Sullivan.  Expansion strategy in new markets: With a combined 2007-08 turnover of Rs 5,000crore (of which Rs 3,000crore is contributed by SLI Sylvania) HavellsSylvania would become a serious contender in the $29 billion global lighting market. This includes expansion and new business in Eastern Europe, Middle East, South America and Asia. It also wanted to address the professional lighting business in a big way, where Chinese products weren't a serious threat.  Cheap valuation of a premium brand: The fact that Sylvania was being offered at a modest premium of 5%-10% which virtually negated any control premium for the proposed deal meant that Havells can aspire to undertake a debt funded deal for a purchase consideration of US$ 300million at an initial target for US$60-70million. The fact that Havells had a low gearing ratio of 14% (March 2006) meant that there was sufficient financial headroom for the acquisition. 4. Merger rationale for Sylvania: Havells as a successful M&A partner: Havells had a track record of five successful acquisitions, and high growth in its Indian operations. o o o  In 1983, it bought the loss-making Delhi-based Towers and Transformers Ltd and turned it around in a year Between 1997 and 2001, Havells also bought ECS, Duke Arnics Electronics and Standard Electricals Established a 50:50 joint venture with UK-based Crabtree. Havells later acquired Crabtree's stake in the JV in 2007 for a consideration of INR 2,100 crores. Analogy to corporate restructuring: The lighting and fixture industry segments globally in 2006 and 2007 was punctuated with increasing competition from cheap imports from Chinese branded and unbranded manufacturers which were diverse and none with sufficient financial capacity to buy Sylvania’s European and South American operations. In such scenarios where the profit margins on commoditised products are falling and demand for premium brands is decreasing as witnessed in the lighting and fixtures market in Europe and South America at that time, the scope for inorganic growth via M&A consolidation increases. 9
  10. 10.  Anti monopolistic and anti trust issues in UK, USA, Germany, France etc : In 2007, the world’s lighting market was dominated by four players - Sylvania, GE, Philips and Osram, each of whom had roughly a quarter of the market. As the imminent need for consolidation was felt within the major players, the next issue arose that with an outright takeover by any one of the other three, the proposed deal would likely run afoul of competition laws in different markets most prominently of them - UK, USA, Germany, France, Canada, Brazil etc. Hence Sylvania’s geographies were decided to be divided into two broad baskets with complementary product offerings:o o  North American theatre with specialisations in incandescent light bulbs, compact fluorescent lamps, light-emitting diode systems and LMS (Light management systems) catering mainly to industrial, automotive as well as underground (mining, monorails, subways) segments European, South American and Asian theatre specialising in residential and office fixtures Cost synergies due to leveraging of Havells production bases in India: With manufacturing facilities are located at Faridabad in Haryana, Alwar and Neemrana in Rajasthan, Haridwar in Uttarakhand, Sahibabad and Noida in Uttar Pradesh and Baddi in Himachal Pradesh, Sylvania found the massive manufacturing facilities favourable for producing the now commoditized florescent lights and incandescent like light bulbs as well as LEDs. This allowed the European facilities to focus on fixtures and energy efficient lightings . This is where Sylvania's expertise in fixtures will come handy. Fixtures, which constitute 70% of the lighting business , are a totally fragmented business.  The thrust from financial investors to strategic investors: At the time of proposed deal, the major investors in Sylvania which included a Private Equity consortium of DDJ Capital, Cerberus Capital Management and JP Morgan Securities and who were in the contro l of company were in throws of management change. The PE investors were looking for a possible exit and the best exit route for them would be an acquisition from another strategic player  Future access to emerging markets for complimentary products The fact that Havells would provide a suitable tool for expanding its presence in emerging Asian markets would enable them to counter the declining demand in Europe and Americas. This would also fit in the overall thrust of the Sylvania management “to have a substantial presence in BRICs and MINTs by the end of 2015 with a minimum market share of 5%” as outlined in its vision document in 2006. This also would have provided them a foothold in the markets where they would launch their premium energy saving fixture products in the future. 5. Deal Details:The merger of Sylvania into Havells was a complete merger so that South American, European and Asian divisions of Sylvania LLC were incorporated into Havells. Havells Sylvenia is the entity after merger headquatered in India (Noida) and London. The actual acquisition was undertaken by Havells Netherlands B.V. which was the step subsidiary of Havells but was not incorporated as such in Europe. Havells Netherlands had been disclosed as a step-subsidiary of 10
  11. 11. Havells in EU FTC filings. This was most probably a shell company incorporated for tax purposes. (The actual ownership has not been declared by Havells or Sylvania).Havells Netherlands B.V. then acquired Sylvania LLC in all three geographies. The debt recourse of € 120mm of the term debt was aimed at this Havells Netherlands B.V with €80mm in recourse to Havells India Pvt. Ltd. This was renamed as Havells-Sylvania. After the restructuring program, Havells Sylvania was merged into Havells India Pvt. Limited with no separate existence. Havells- Sylvania now remains as the only entity with two separate brand names – Havells and Sylvania. Indirect subsidiary (step owned) Havells India Havells Netherlands B.V. Acquired Sylavnia’s three divisions Sylvania LLC (Europe, South America and Carribean) Merger of equals Merged After restructuring, Havells India and Havells Sylvania were merged into one entity Havells - Sylvania (subsidiary of Havells India Ltd.) Havells - Sylvania Ltd. A ratio analysis of Havells consolidated balance sheet items from 2005 onwards bear out this fact:Havells India (in INR cr) Mar’13 Mar ’12 Mar ’11 Mar ’10 Mar ’09 Mar ‘08 Mar ‘07 Mar ‘06 Mar ‘05 Investment Valuation Ratios Face Value (INR) 5 5 5 5 5 5 5 5 5 Dividend Per Share -- -- -- -- -- -- -- -- -- 53.61 56.15 45.08 56.23 48.31 60.41 27.48 38.97 52.85 618.55 550.51 473.18 902.34 911.15 863.59 287.47 373.41 502.63 -- 63.1 40.97 45.71 95.9 109.15 42.45 58.53 65.19 82.68 82.68 82.68 65.4 67.81 70.44 75.89 51.79 12.73 Profitability Ratios Operating Profit Margin(%) 8.66 10.19 9.92 6.23 5.3 6.99 9.55 10.43 10.51 Profit Before Interest And Tax Margin(%) 7.21 8.8 8.45 4.68 3.64 5.59 8.91 9.77 9.78 Gross Profit Margin(%) 7.24 8.81 8.49 4.68 3.65 5.6 8.92 9.8 9.81 Cash Profit Margin(%) 6.4 7.03 6.88 2.78 2.34 4.3 7.16 6.91 5.78 Adjusted Cash Margin(%) 6.4 7.03 6.23 2.78 2.34 4.3 7.16 6.91 5.78 Net Profit Margin(%) Adjusted Net Profit Margin(%) 7.5 5.37 5.13 1.28 -2.91 3.21 6.59 6.28 5.21 7.5 5.37 5.38 1.28 -2.91 3.21 6.59 6.28 5.21 25.48 33.91 28.25 17.64 11.21 14.5 44.12 35.51 22.68 Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital Return On Capital Employed(%) 11
  12. 12. Return On Net Worth(%) 40.31 38.71 46.43 17.38 -26.15 23.94 39.23 35.95 35.2 Adjusted Return on Net Worth(%) 26.84 40.71 44.07 16.9 6.26 21.46 38.87 35.94 34.35 Return on Assets Excluding Revaluations 115.57 76.59 52.39 66.51 101.76 116.06 48.42 65.46 74.67 Return on Assets Including Revaluations 115.57 76.59 52.39 66.51 101.76 116.06 48.42 65.46 74.67 Return on Long Term Funds(%) 27.12 44.37 39.32 21.92 14.73 17.31 45.91 43.9 35.36 Liquidity And Solvency Ratios Current Ratio 1.29 0.89 0.86 0.87 0.95 1.12 1.18 1.06 0.93 Quick Ratio 0.74 0.56 0.56 0.61 0.81 0.82 0.42 0.74 1.41 Debt Equity Ratio Long Term Debt Equity Ratio 0.61 0.91 1.71 2.66 2.01 1.93 0.21 0.62 2.01 0.55 0.46 1.71 1.95 1.29 1.45 0.17 0.31 0.93 4.81 5.68 5.55 2.97 1.91 3.04 8.7 5.63 4.38 0.58 0.91 1.46 2.66 2.01 1.93 0.21 0.62 2.01 5.7 6.01 6.28 3.5 2.37 3.45 7.18 4.77 3.83 6.61 4.92 5.26 2.57 0.44 3.24 6.34 4.08 3.09 6.07 5.25 5.32 6.74 7.08 4.98 7.05 6.3 6.74 8.8 8.26 7.63 7.46 6.94 11.72 19.42 6.88 -- 6.07 5.25 5.67 6.74 7.08 4.98 7.05 6.3 6.74 2.7 2.5 1.97 2.02 1.9 1.89 6.33 5.94 5.6 4.02 4.73 3.76 4.49 3.7 3.2 4.86 3.51 2.23 3.76 4 2.08 2.02 1.9 1.89 6.33 5.94 5.6 -- 42.31 28.83 32.88 30.4 37.61 18.3 33.71 20.66 -- 64.17 60.91 46.97 44.34 66.03 48.37 7.52 9.13 35.05 19.17 15.51 14.89 39.43 58.75 16.53 46.43 102.12 Material Cost Composition 54.28 55.88 58.41 54.22 51.86 58.51 68.56 63.07 65.19 Imported Composition of Raw Materials Consumed -- -- -- -- -- -- -- 13.87 6.98 6.09 13.94 13.63 14.64 13.4 13.61 14.18 16.51 15.12 -- -- -- -- -- -- -- 7.25 8.3 Dividend Payout Ratio Net Profit 18.83 25.48 11.94 38.88 -- 10.52 15.39 12.15 10.75 Dividend Payout Ratio Cash Profit 15.84 20.28 9.43 17.64 -25.29 7.28 14.04 11.04 9.48 Earning Retention Ratio 71.72 75.78 87.43 60.03 -- 88.27 84.47 87.85 88.98 Debt Coverage Ratios Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio Asset Turnover Ratio Average Raw Material Holding Average Finished Goods Held Number of Days In Working Capital Profit & Loss Account Ratios Selling Distribution Cost Composition Expenses as Composition of Total Sales Cash Flow Indicator Ratios 12
  13. 13. Cash Earning Retention Ratio AdjustedCash Flow Times 77.96 80.53 90.17 82.14 86.35 92.15 85.84 88.96 90.31 1.68 1.79 2.6 7.04 9.52 6.01 0.51 1.58 5.15 The noted points of this ratio analysis are:    The debt ratios show a decrease in interest coverage in increase in interest coverage due to acquisition of Sylvania in 2007 to 2008 but show the same trend in 2010 to 2011 as restructuring program was kicked in and Havells managed to renegotiate debt covenant on more stricter terms after failing the DSCR coverage ( shown by interest coverage ratio which was stipulated to be below 5.00 The Debt to equity ratio shows an increase constantly from 0.17 to 2.95 in 2010 first due to acquisition and then to ensuing restructuring The management operating ratio all show an improvement over the acquisition and the ensuing restructuring time. Inventory Turnover Ratio, Debtors Turnover Ratio, Investments Turnover Ratio etc. show a minimum improvement of ~20% to ~45% on a cursory glance which suggests that the actual synergy must have been within this range. This conforms to the reported synergy of ~30% on a cost basis. The profitability ratio show a initial decrease due to acquisition of a struggling but premium portfolio of product and gradual improvement to pre acquisition levels. As Sylvania was an unlisted entity (run by a consortium of PE players), the exact synergy that the acquisition deal brought was not revealed by the merging parties. In their MD&A (Management discussion and analysis), Havells reported a synergy of 30% in cost items after the restricting was completed in 2013 (Havells Annual Report 2013 and Investor Call Transcript dated 23rd May 2013). 6. Deal Structure:Sylvania’s lighting business was acquired by Havells in April, 2007 for a total consideration of €227mn (8.4x FY08 EV/EBIDTA) financed entirely with debt of €200mn. Additionally, there were pension liabilities worth €27mn in the books of Sylvania.Out of the total debt €80mn was with recourse to Havells, which was funded by bridge loan of €50mn and term loan of €30mn. Bridge loan of €50mn was repayable in 18 months. The company repaid this bridgeloan through the proceeds of private placement to Warburg PincusGroup Company (Seacrest Investment Ltd). Term loan of €30mn was repayable in 9 semi annual payments of €3.3mn each from April’08-April’12. Remaining €120mn of the total debt of €200mn was in the form of €80mn in term loan while €40mn as revolver facility. The company repaid €4m of the term loan facility in 2008. However, debt covenants for the remaining payments of term loan had to be restructured as severe global financial crisis hit the performance of the companysharply. Under the new agreement, payments were differed till 2013 and the company will pay €12mn/€12mn/€52mn in CY11/CY12/CY13. The revolver loan of €40m has to be repaid in bullet payment in April’12. 13
  14. 14. 7. Warburg Private Placement:Havells issued 4.1m equity shares to Warbug Pincus at Rs625/share, aggregating to Rs2.6b, which it used to repay a bridge loan of EUR50m that it had taken for the acquisition. This allows it to issue USD110m new equity which diluted existing shareholders by 11.2%. Seacrest Investment Ltd, a Warburg Pincus group company, has agreed to invest the above amount. Issue details:  4.16m equity shares of INR5 each at a price of INR625 per share aggregating to INR2.6bn  2.6m warrants at INR690 per warrant aggregating to INR1.8bn on a preferential allotment basis Key pointers of Warbug investment: High valuation: The company has received higher valuation than prevailing trading comps,which is positive.  Debt repayment: The company paid a bridge loan of USD65m which was raised for Sylvania acquisition  Finance capex: Around US$45m has been raised to fund the capacity expansion in India, which was used to cater to increasing demand, and eventually shift the manufacturing base of Sylvania to India. 14
  15. 15. About Warburg Pincus: Warburg Pincus is a leading private equity fund that is active in India. It has investments of morethan USD26bn across energy, technology, media, healthcare, financial services and consumer durables verticals. It has invested close toUS$2bn in India in the last 12 years, making it one of the largest private equity investors in India. The investment in Havells gelled very well with the investment philosophy of long term investor like Wargbug incus. This was also construed by the banks who were earlier reluctant to give a go ahead signal to Havells restructuring plan, as a thumbs up. 8. Post merger Analysis: Mangement Change for Sylvania post acquisition: Havells decided to go with the existing management especially Paul Griswald, the then CEO of Sylvania who had been successful in turning around Sylvania during its bankruptcy in 2002 when he was Private Equity consortium of DDJ Capital, Cerberus Capital Management and JP Morgan Securities . With experience working in the paper and chemical industries and at a merchant bank before—he led the international consumer packaging operations at Pepsico , and later at Tenneco Packaging—he came with just the right credentials to turn around the ailing company. After the acquisition and onset of Global Financial Crisis in 2008, this management proved to be a hindrance in restructuring of Sylvania.  Declining sales of Sylvania post merger and Corporate restructuring programe: As the meltdown rocked European markets, Sylvania's sales fell, leading to net losses of Euro 16.3 million in 2008/09 and Euro 26.1 million in 2009/10. From Euro 515 million in 2007/08, revenues dropped to Euro 438.4 million in two years. 15
  16. 16. The global financial crisis led to the slowdown in the consumption and construction activities in the key geographies of Sylvania. Decline in demand coupled with high fixed cost structure resulted in sharp declineof EBIDTA by 58.8% in FY09 and loss in FY10 at operating level.  Falling operating efficiency of Sylvania though Havells on a standalone basis remained performing: Sylvania recorded a revenue decline of 8% (in EUR terms), with EBITDA margin of 4.4% (+440bp YoY). HAVL spent Rs2bn on restructuring to lower operational costs at Sylvania. It closed the loss‐making plants and reduced workforce. The benefits of these steps reflected in FY11 EBITDA which increased to Rs2.1bn (margin of 7.8%) in FY11 from Rs192m in FY10 (margin of 0.6%).  Covenant breach in Sept. 2008 and demand for an asset sale by lenders to recover outstanding loans In September 2008, Sylvania's bankers, led by Barclays Capital, hit the panic button as the company breached its covenants . Havells has raised EUR200m for the acquisition of Sylvania of which EUR120m is recourse to its balance sheet. Sylvania’s balance sheet had EUR110m-115m in receivables. 16
  17. 17. Management indicated that it would sell Sylvania’s receivables (factoring) and pay back part of the outstanding debt. This will lower debt to equity ratio and improve balance sheet. The net debt-equity stood at 1.1x, for the consolidated entity. The next challenge was to persuade banks, which were reluctant to fund the restructuring plan. It didn't help that the Indian electricals market had crashed. The banks agreed only to a twomonth deferral of repayment of loans, helping Havells with a Euro 24-million cushion for that period. So Havells poured some Euro 12 million into the restructuring plan.  Corporate restructuring program In response, the company embarked on two restructuring programs at Sylvania namely Project Phoenix and Project Prakram: Project – Phoenix Commenced in Q1 CY09, Project Phoenix consisted of reduction in manpower across Latin America and Europe, reduction in warehouses and closure of plants in Brazil and Costa Rica and working capital and material cost reduction. This involved a one time cost of €12mn with estimated benefits of ~€17-18mn. Project - Prakram Project Prakram focused on rationalizing fixed costs, increasing the outsourcing from low cost countries including China and India,increasing savings in material costs and higher managerial participation by Havells. It involved one time cost of €20mn. To begin with, a factory each in Brazil and Costa Rica were closed. Operations at a UK factory were suspended and shifted to India, where labour accounts for four to five per cent of the total cost (in Europe, it accounts for 22 per cent). Noncritical staff - accounts, IT, factory personnel - in European and Latin American operations was also laid off. Some back-office jobs were shifted to India. The total headcount of 3,800 (at the start of 2009) was reduced by 41 per cent to 2,233. Reduction of working capital requirements To reduce the working capital requirement, the amount of inventory at the company level was cut from Euro 70-75 million to Euro 40 million without affecting the ability to serve customers on time. Since 2007, outsourcing from India and China has jumped from 38 to 60 per cent Competitive pricing 17
  18. 18. Sylvania's products were priced 15 per cent lower than those of rivals Philips, Osram and GE. This was of little help to Sylvania, which makes high-end products, and also diluted the brand. Siyvania raised prices in Europe and Latin America by five to eight per cent. Layoffs Noncritical staff - accounts, IT, factory personnel - in European and Latin American operations was also laid off. Some back-office jobs were shifted to India. The total headcount of 3,800 (at the start of 2009) was reduced by 41 per cent to 2,233. Remarkably, the layoffs did not result in a single day's strike. The company strictly followed labour laws in each country, and ensured that final settlements went off smoothly. he company also spent around Euro 4 million less on the restructuring than the Euro 36 million anticipated. Besides reducing the headcount, several areas were targeted including logistics, inventory management, and product pricing. Havells worked closely with logistics companies and shut down some warehouses, reducing logistics costs from 14 to six per cent of total cost. 9. Performance of the merged entity  Return to profit due to operating synergy The careful calibration of the restructuring program resulted in the increase in operating performance of Sylvania due to increased cost synergies and revenue complementarities.  Streamlined cost structure after acquisition 18
  19. 19. Across business units on a consolidated basis (excluding Sylvania), a sustainable cost structure can be broadly represented as follows:-  Streamlined business structure after acquisition However, it needs to be noted that wide variances in margins profile exists across different product segments for the company. Margins are highest in the switchgear segment followed by the fans segment Resilient demand and brand re-launch in emerging markets to bring in growth despite muted Europe – Sylvania’s revenue declined by 15% in FY10 as slowdown hit the markets across geographies. Even though Europe remained muted through FY11 with some recovery in FY12. However, growth in emerging markets enabled Sylvania to maintain the sales level of FY10 in ensuing year and record growth in FY12. 19
  20. 20. • Volume growth in Europe remained muted but pricing was stable; Sylvania had a price hike in line with other industry players • Increased demand for CFLs in Latin America driving growth • Sylvania re-launched its products in emerging countries where the brand was already present in the past. For starters, Sylvania targeted India and North Africa for re-launching the brand  Debt rationalization 20
  21. 21.  Product Complementarities: The most remarkable thing about the acquisition was the fact that the acquisition resulted in product complementarities with Havells having a dominant presence in less research intensive segments which found a huge market in emerging countries giving them crucial volumes growth while the European subsidiaries after defeating the initial competition from the other major players ( which was achieved by the restructuring program), generated huge EBITDA margin improvements from niche and premium products. Also there was Sylvania’s brand re-launch in emerging countries, increased outsourcing to low cost countries, curtailed fixed cost base, and better cash flow that increased value perception. Even then, Sylvania is yet to catch up to industry average profitability levels. This is evidenced from the below mapping of the product portfolio of the combined entity:- 21
  22. 22. 10. Comparative Valuation with peers after merger 11. Transaction comparables M&A deals in the consumer electricals sector have happened at premium valuations in the range of 2.5x-3x trailing 12month sales. The target valuations for Havells Standalone business implying an EV/sales of ~2x FY10 sales seems quite reasonable given Havells’ better margin profile and capital efficiencies as compared to its peers 22
  23. 23. 12. 1) 2) 3) 4) References Economic Times : Havells Sylvania with a new beginning; By Vikas Kumar, ET Bureau | 18 Jul, 2008 http://economictimes.indiatimes.com/articleshow/3247784.cms?utm_source=contentofinterest&utm_medium=text&utm_camp aign=cppst Forbes magazine : When Havells bought Sylvania; By Malini Goyal, Forbes ! 26 Aug,2010 http://www.forbes.com/2010/08/26/forbes-india-havells-managed-sylvania-acquisition.html Hindu business Line : The “shocking rise of Havells”; By R. Srinivasan; 6 December 2012 http://www.thehindubusinessline.com/features/weekend-life/the-shocking-rise-of-havells/article4171177.ece Business Today : Darkness to light, How a smart turnaround strategy helped Havells to make a comeback, By Manu Kaushik; 18 Aug 2013 http://businesstoday.intoday.in/story/smart-turnaround-strategy-helped-havells/1/197235.html 5) ICRA Equity Research Report dated March 14, 2011 6) http://www.icra.in/files/pdf/Havells-201103.pdf Equity research reports from Thomson One banker 23

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