HUL, Everstone in talks to jointly run Modern Foods

HUL, Everstone in talks to jointly run Modern Foods

Tue, 09/16/2014 - 13:30

MUMBAI:India's largest soaps and detergent maker Hindustan Unilever has begun talks with private equity fund Everstone Capital for a possible equity joint venture for its Modern Foods division which makes bread and rusks under the Modern brand, three people involved with the plan said.
 
The move by the private equity fund, which jointly owns the India franchise of the American Hamburger restaurant chain Burger King, is to drive synergy from Modern Foods for the quick-service restaurant chain, these people added.
 
"HUL wants to partner with Burger King and has approached the India franchise for a possible equity partnership," a person with direct knowledge of the development said. "Depending on how the talks progress, a complete sellout can't be ruled out." An Everstone spokesperson did not respond to an emailed questionnaire from ET.
 
Last year, Everstone Capital, that manages more than $1 billion in Indiafocused PE fund, won the India franchise Burger King as part of its plan to invest in the Indian consumption space. The fund will soon open its first outlets in Mumbai and Delhi NCR and slowly grow the network to the Tier-II and -III cities where its rivals, McDonalds, Pizza Hut, Dominos and Yum brands have already established their presence in the $48-billion industry.
 
"The deal values the bakery business anywhere between Rs 200 crore and Rs 250 crore," an investment banker with knowledge of the development said. "As a policy, we do not comment on future business plans and hence have no comments to offer for your query on future growth plans of Modern Foods," an HUL spokesperson wrote in an email.
 
HUL's bakery business sells variants of white, brown, milk and whole grain breads along with cream rolls, fruit breads, buns, cakes, cookies and rusks. The 42-year-old brand commands more than 45% of the market share. "Partnering with a large Indiafocused private equity fund will help the bakery business expand and increase its market share further," a third person involved in the deal said.
 
Burger King, which is betting big on the fast growing restaurant market where every two out of three people eat out once a week, believes that having its own bakery unit will be cost-effective in the long run. According to a 2013 report by Technopak Advisors, the Indian food service market was estimated to be $48 billion in 2013. Quickservice restaurant chains such as McDonald's and Domino's accounts for around $2.5 billion of the market in 2013 and are projected to grow to $8 billion by 2020.
 
The retailing giant has been looking to divest its stake in the bakery business for some time now. In the past, it had explored various options, including a complete sale to strategic investors. Analysts say that HUL's move is logical.
 
"It would be logical for HUL to exit the bakery business, given Unilever's portfolio misfit," said Gautam Duggad, vice-president, research (FMCG & Retail), at Motilal Oswal Financial Services. "The stake sale or a complete sell-off would depend on valuations because HUL is not in dire straits to sell or hard-pressed for cash."
 
Since HUL bought Modern Foods in 2002 from the government under the disinvestment programme, the company had been struggling with the bakery unit as high costs and an unmanageable work force in the lowmargin business made it unviable.
 
Also, analysts said HUL's food strategy has always been half-baked in India, focusing largely on soups, ice-creams and beverages. "To turn it around calls for innovative strategy and focus, which is completely absent in HUL,'' said an HUL official. "It makes sense to exit the business soon."
 
HUL officials have in the past admitted that the acquisition was a complete misfit with the HUL culture and systems.