In February 2000, as part of its disinvestment programme, the Government of India (GoI) sold Modern Food Industries (India) Limited (MFIL) to Hindustan Lever Limited (HLL) for Rs. 1.05 billion. This was hailed as a major step in the GoI’s disinvestment plan. However, some analysts questioned the GoI’s decision to sell MFIL – a company with 14 production units spread across the country and almost 0.5 million square meters of land – for just Rs. 1.05 billion. The acquisition of Modern Foods provided HLL control over 14 bread manufacturing units and a distribution network with 22 franchise units. HLL officials said that the vast distribution network of MFIL would help the company’s growth in the high-end of the foods business. HLL, which sold branded wheat, felt that it could generate synergies in procurement. This would be critical to success in a low margin, high volume business. Analysts felt that the sale of MFIL was well timed since the company was sold as a going concern, not as a BIFR case. However, some analysts were of the opinion that the sale was undervalued. Apart from machinery at its 14 bakeries, MFIL had 19 franchises and six ancillary units scattered across the country. Some analysts felt that the real estate alone—16 acres in Delhi, 4 acres in Kanpur and 18 acres in Mumbai— would be worth over Rs. 5 billion. They felt that HLL had paid for the brand and got the fixed assets for free. The Comptroller and Auditor General of India (CAG) also criticised the government for not valuing MFIL correctly. The CAG also criticised the valuer of MFIL (ANZ Grindlays Bank) for not taking into account the value of surplus land in Delhi Business Unit-I as well as the leased land of the Silchar unit in Assam. The GoI said that its decision to sell off 74 per cent of its stake in MFIL to HLL ensured a cash flow higher than ANZ Grindlays Bank’s valuation and prevented the company from being declared sick. ANZ Grindlays Bank had valued the entire company at Rs. 785 million only, while HLL had valued MFIL at Rs 1.65 billion. HLL made an upfront payment of Rs. 1.05 billion for the 74 per cent government equity in MFIL, besides agreeing to infuse Rs 200 million for technology upgradation and modernisation. The GoI also claimed that HLL was the only bidder which submitted a formal proposal and offered a higher sum than ANZ Grindlays Bank’s valuation. Thus, the best option before the GoI was to sell majority equity to HLL and save the company from being caught in the BIFR’s net. After HLL acquired MFIL, MFIL’s losses went up. By December 2000, MFIL’s accumulated losses increased to Rs. 470 million (in 1998-99, MFIL made losses of around Rs. 69 million) as against its networth of Rs. 330 million. In early 2001, MFIL was referred to the Board of Industrial and Financial Reconstruction as more than 50% of its networth had been eroded by its losses. Officials of MFIL alleged that HLL wanted MFIL to be referred to BIFR so as to get some relief from banks and financial institutions. They further contended that if HLL had used the Rs 200 million it infused into MFIL as preference share capital instead of loans, MFIL would not have become sick. However, HLL officials said that they had little choice but to go to the BIFR, because MFIL’s accumulated losses had exceeded 50 percent of its peak net worth, over a four year period. According to section 23 of the Sick Industries Act (SICA) if a company’s accumulated losses over four years exceed 50 percent of net worth, then it has to be declared sick and referred to BIFR. In 2001, HLL set a two-year timeframe to turn around MFIL. The turnaround included providing financial assistance to distribution channels and introducing better-quality bread ingredients to improve quality. HLL had already pumped in around Rs. 200 million in MFIL by way of secured loans and corporate guarantees. HLL officials claimed that MFIL’s sales had more than doubled since it was acquired. Said an official, “While we have already achieved a turnaround in sales, a turnaround in financial terms (profitability) will happen in the next two years.” The increase in sales (actual figures not revealed) was mainly due to an increase in the number of outlets that sold MFIL bread. In Mumbai, the number of outlets increased to about 250 from 100, and crossed the 400-mark in New Delhi. Ever since HLL took over the company, it seemed to have focussed on improving the quality of the product and its distribution. It also helped MFIL leverage on HLL’s strengths in areas such as wheat procurement, communication, treasury, and training. In mid 2001, HLL introduced a voluntary retirement scheme for employees of four units of MFIL that were closed and for its surplus employees at other locations. Work was suspended between 1991-99 at four of MFIL’s 19 factories—Kirti Nagar (closed since June 1999), Ujjain (closed since March 1994), Bhagalpur (since October 1998) and Silchar (abandoned at the project stage itself in October 1991). Workers in these units were drawing wages. Moreover, many units at different locations had surplus manpower. HLL officials said MFIL’s losses would reduce to Rs. 200 million in 2000-01 from Rs. 480 million in 1999-00. In 2000-01, the first year under HLL’s management, bread sales of MFIL increased to Rs. 1.02 billion from Rs. 780 million in 1999-2000. Growth in bread sales in the first four months of 2001 was 80 per cent over the corresponding period of 2000. Meanwhile, MFIL’s management was planning to initiate talks with the employee federations to put in place a streamlined and productivity-linked incentive scheme for its workforce. MFIL’s management had initially worked out a one-year agenda with employee federations in September 2000. MFIL had a workforce of about 2000 of which 490 had applied for the VRS scheme introduced by the company in June 2001. Of the 520 applications for VRS, about 490 were cleared at a cost of an estimated Rs. 150 million to the company. In late 2001, MFIL was also looking for ways to spread its manufacturing base and was aggressively setting up ancillaries through arrangements with existing bakeries. The company was exploring the possibility of expanding in big towns, where MFIL did not have a presence, besides spreading to other smaller towns. The next few years would tell whether MFIL could be transformed from an ailing PSU into a breadwinner by HLL.

1. Analysts felt that by taking over MFIL, HLL could consolidate its position in the food business. Identify and describe the synergies that HLL was looking for by taking over MFIL. 2. MFIL was plagued with capacity under-utilization, and labor problems. Discuss various strategies adapted by the HLL to revive MFIL.