The government has awarded its 74% stake in Modern Foods Industries to Hindustan Lever Limited (HLL). The government stands to rake in over Rs 1 bn from this strategic sale. The government will continue to hold the remaining 26% stake in the company.
HLL is the largest consumer products company in India. HLL's business portfolio comprises soaps, detergents, personal products, food products and frozen desserts.
Modern Foods Limited has a network of 14 bread manufacturing units and a comprehensive distribution network comprising 22 operating franchisee units. The company had sales and profits of Rs 1.78 bn and Rs 48.4 m respectively.
Modern Foods, though only a fraction of HLL in terms of size, is a key acquisition for the company. This is mainly due to the fact that HLL has singled out its food business as its new focus area. The acquisition of 'Modern' will make it the largest organised sector player in the bread market. Furthermore, HLL could leverage the brand 'Modern' to launch a range of bakery and other related products. The acquisition will also provide HLL with an avenue to deploy its large cash reserves.
The downside to this acquisition arises from the presence of the government as the other shareholder. The government could block measures to improve productivity by rationalising the work force. This is already evident in the condition that there will be no retrenchment for atleast one-year after the signing of the deal.
The agreement is categorical when it comes to the terms pertaining to the employees. In case of default, the strategic partner's stake would be bought out at a discount or the government's entire holding will be sold to a strategic partner at a premium.
From the economy point of view, this is a landmark deal in India's (read government's) attempt to rid itself of the public sector units. Although the amount raised is just 1% of the targeted proceeds from disinvestment for FY00, it will nonetheless catalyse the entire process.
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