The ITC Classic Story



Themes: Merger and acquisition takeover
Period : 1991 - 1996
Organization : ITC Classic, ICICI
Pub Date : 2002
Countries : India
Industry : Financial Services

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Case Code : FINC005
Case Length : 06 Pages
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"ITC is ready to hawk ITC Classic to anyone, for even a rupee."

- An ITC Classic manager in 1997.

"There is no value in ITC Classic. I wonder how ICICI will benefit from the merger!"

- A stockbroker in 1997.

Troubled Times

In late 1996, almost half of the executives on board of the tobacco to hotels major ITC Ltd. were in jail on charges of FERA and excise violations. It was at this point that the downfall of ITC Classic Finance (Classic), ITC's flagship financial services 49% subsidiary, began.

The scandals in ITC had a massive damaging effect on the ITC brand and corporate image. The impact got reflected on Classic too and it was inundated with desperate fixed deposit holders wanting to withdraw their funds. Funds worth over Rs 50 crore were withdrawn within a few days after the crisis broke out. The continuing uncertainty on fund flows into the company and the eroded value of its portfolios began scaring off potential investors and foreign partners as well. International Finance Corporation (IFC), which was to provide a credit of $ 45 million to Classic, also held back the offer till 'things cleared up.'

Analysts were quick to raise fingers at Classic's negative cash flows, its huge asset liability mismatch and the slow process of divestment of stakes held by Classic in the ITC group companies. Like the proverbial 'final nail in the coffin,' Classic declared a Rs 285 crore loss in June 1997, which almost wiped out its entire net worth.

Meanwhile, troubles mounted as redemptions kept increasing - from Rs 750 crore in mid 1996, deposits came down to Rs 550 crore in May 1997. From a peak level of one million depositors, Classic was left with just six lakh. ITC gave Classic a Rs 75 crore credit line to maintain cash flow to meet the redemption pressure. There were even reports that Classic had to take inter-corporate deposits1 to fund the outflow. The sustained downturn in the capital markets during 1995-96 added to the company's woes and soon, key personnel began leaving the company. Already neck-deep in legal troubles, ITC realized that it would be better off without Classic to add to its problems. ITC then initiated discussions with Daiwa Securities of Japan and a few Korean, British and American investment banks for a possible tie-up. A Business Today report2 claimed that ITC was desperate not to let Classic go for liquidation, as that would have reflected badly on its brand power. ITC announced that it was even willing to infuse more funds to keep Classic afloat.

Both GE Capital and the Hinduja Group evinced interest in Classic. Since they laid down very stiff terms for the buy-out and valued Classic much below ITC's expectations, talks did not proceed further. Nothing seemed to be working out in favor of Classic as there were no takers for a company with non-performing assets of over Rs 350 crore and an investment portfolio that was by any standards an extremely poorly executed one. At this juncture, ICICI Ltd. stepped in as the 'knight in the shining armor' to rescue Classic, taking the corporate world and the media by surprise. All those involved in the issue kept asking themselves - What did ICICI see in Classic that so many other companies could not?

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1] Funds borrowed from other companies as a short-term source of finance.
2] May 22, 1997 issue.