My regular days work involves advising corporate clients and their owners on strategy - with specific emphasis on corporate finance. this takes form of advice on mergers, acquisitions, reorganisation or capital raise (venture capital / private equity / et al). One of my long standing entreprenuer client with interest in outsourcing / software as a service was discussing a competitors ability to attract private equity capital and the reasons why he could not!!! I have been explaining him in bits and pieces on account of the reasons not being evident from publicly available documents. I am now able to after a couple of years put together the reasons with appropriate proof from public documents. I hope others also find the learnings relevant and take all information about valuations with pinch of salt (if not a fistful). The case I am discussing is of Aparajitha Corporate Services limited. Like a consultant worth his salt, I state the disclaimer - My learnings below can be construed as opinion and hence I disclaim any liability on account of anyone relying on this as taking decisions.
Circa Vikram Samvat 2071 (i.e. Gregorian year CE 2014), there was a big news for outsourcing industry when Aparajitha group raised equity from Everstone capital at disclosed value of approximately INR 400 crores (refer link - https://timesofindia.indiatimes.com/business/india-business/everstone-to-buy-25-in-hr-outsourcing-firm-aparajitha/articleshowprint/30642309.cms). The owners (incidentally on of whom is a Chartered Accountant) took home about INR 71 crores of the total INR 100 crores invested by Everstone through transfer of their own shares and balance was introduced as growth capital in the company. As average reader and followers of capital markets this seems to be good deal. The company was clocking revenues of about INR 200 crores and net profits of about INR 20 crores during that time. so a PE ratio of 20 seemed a good one.
Circa Vikram Samvat 2076 (i.e. Gregorian year CE 2019), the business was not growing in the manner envisaged. The investor was looking at exit given their own timelines for fund closings. Pressure on the original owners to come up with some exit possibilities was obviously growing. An announcement was made that year, wherein INR 170 crores was raised by Aparajitha Capital (group company) issuing debentures (repayable in 48 months) to a UK based lender - Investec PLC. It was clearly stated that the amount raised by issue of debentures was for buying shares of Aparajitha corporate services by Everstone. The specific matter to be examined here is that the debenture issue was based on mortgage / hypothecation of all group assets and PERSONAL GUARANTEE OF THE ORIGINAL OWNER. thus Everstone capital which was supposed to be "equity owner" got 70% profit from this transaction. This profit came primarily because the Original owners gave personal guarantee and put their own wealth at stake. The moot question that emerges is what are the compulsions which made the original owners (who got at that time INR 71 crores) to provide guarantee for INR 170 crores loan!!! Was the original investment of INR 100 crores investment truly "equity" or not?
Circa Vikram Samvat 2078 (i.e. Gregorian year CE 2021), as the business was not growing substantially there is obviously a strain on business cashflows and the.business was unable to provide cashflow to service the debenture obligation. the company was clocking about INR 260 crores revenue with net margins of less than INR 10 crores. This would have in turn impacted the personal finances of original owners. an announcement was seen that a Singapore based company in similar space acquired "controlling stake" in Aparajitha group. The financial detail of this deal is yet to be shared in public domain. However based on capital infusion by Singapore parent in its Indian subsidiary, we can estimate that the value paid for acquiring controlling stake in Aparajitha will be around INR 200 crores. Of this if INR 170 crores is used for repayment of debt the next amount available towards acquisition of balance controlling shares would be around INR 30 crores to INR 50 crores.
IN CLOSING, the questions that I would like each reader to introspect:
a. Was INR 400 crores indeed the value of the company in 2014?
b. Post the transaction the original owners networth was INR 300 crores (75% that they owner) plus INR 71 crores (the cash they got from Everstone). was this reflection of actual networth of the original owners?
c. would a rationale person give personal guarantee for INR 170 crores to buy equity from the private equity house which paid INR 100 crores initially?
d. Assuming it was fair transaction, the valuation of the company would have been INR 510 crores. Have the original owners realised such a value during the transaction where the Singapore company acquired controlling stakes? The indications are they would have at best realised about INR 120 crores (if at all).
Many transactions that are considered as Marquee have a very similar flavour. I rely on drawing analogy to the famous "Yudhisthira's lie" of the itihasa - MAHABHARAT. What is announced by the owners of the company, the company and the investor is a misguiding headline of indicative valuation. All these values indicated are not the fair number but general guidances. And hence the question is it true "ASHWATTHAMA the elephant IS DEAD"??!!!