The Hindu Business Line : ‘Kraft’ing a difficult deal

The next fortnight is likely to be a decisive phase in the Danone-Wadia negotiations. The 5.3-billion-euro sale of its biscuits business to Kraft Foods of the US by Danone has infused a new element into the equation and seems to have evened out the field.

Raghuvir Srinivasan

The dispute between French dairy major, Groupe Danone, and the Wadias appears headed for an interesting climax, possibly with a twist in the tail. Danone appears to have gained a critical advantage from the developments of the last fortnight and the field seems to have evened out as negotiations with the Wadias enter what could be the decisive phase in the next fortnight.

The 5.3-billion-euro sale of its biscuits business to Kraft Foods of the US by Danone a couple of weeks ago has infused a new element into the equation that could upset the Wadias’ game-plan.

Even field

The Wadias held the upper hand all along as their permission was critical for Danone to enter the dairy business in India independently. Danone, in its eagerness to make an independent foray, was willing to exit Britannia in favour of the Wadias and even compensate them for rescinding the original Wadia-BSN joint venture agreement.

However, the picture has now changed and this is how. First, with the sale of its biscuits business worldwide (except India and Latin America), Danone has no more need for the Tiger brand.

The ferocious Tiger seems to have lost its claws. At worst, the French company may have to cough up damages if it is proved that it indeed registered the brand surreptitiously outside India.

But the important fact is that the brand is not critical for Danone any more and the Wadias could find themselves with one weapon less their armoury in the battle with Danone.

Second, the entry of Kraft Foods into the equation has probably made things difficult for the Wadias. As per the joint-venture agreement, the first right of refusal rests with the other partner when one of them decides to sell its stake in Britannia. Danone has made clear its disinterest in the biscuits business in India and, in any case, the sale to Kraft Foods clearly proves it. Therefore, it could decide to offload its Britannia stake most probably to Kraft itself.

But Danone has to first offer the right to buy the stake to the Wadias, who will be faced with a difficult situation. At current prices, they would have to cough up about Rs 1,000 crore for purchasing Danone’s stake in Britannia. If they reject Danone’s offer, the French major can choose to sell to Kraft.

Kraft eager

Though Kraft is very keen on the Indian market, why would it want to buy equity in a troubled joint-venture? The answer is that Britannia has an enviable brand reputation in the country and, importantly, it has an excellent distribution network that takes its products to the smallest of shops in the innermost parts of the country. Now, that is something that Kraft might find difficult to ignore especially because it believes that reaching the smallest of retail outlets will be the key to its growth in India.

If Kraft does go on to buy Danone’s stake, it will have to make an open offer to Britannia shareholders as the Takeover Code will be triggered. A minimum 20 per cent open offer could take Kraft’s stake to over 45 per cent which will be substantially higher than what the Wadias hold in Britannia. In other words, ownership in Britannia Industries, which is the cash cow of the Wadia group, could change hands.

This is a possibility that the Wadias will be wary of as they sit down for the next round of negotiations in early August. But their trump card would be the Wadia-BSN joint venture which Danone is keen to rescind. The Wadias could leverage that to craft a deal that would keep out Kraft Foods from Britannia.

A negotiated settlement that protects the interests of both parties could run something like this: The Wadias agree to rescind the Wadia-BSN joint-venture agreement in return for a cash compensation and a legal assurance by Danone that it would keep its stake in Britannia and assume the status of a passive partner without management rights. This would mean that Danone gets to make its independent entry in the dairy business in India where Britannia has little interest anyway. For Danone, the Britannia investment would be just that, an investment. That is how it is accounted for in Danone’s books now anyway.

Genesis of the disagreement

Danone and the Wadias are equal partners, holding approximately a 25 per cent stake each in Britannia Industries. This stake is held indirectly through a London-registered holding company, Associated Biscuits International Ltd, which holds 45.13 per cent, and five other investment companies that hold about 1.17 per cent each in Britannia’s equity.

The Wadias and Danone also jointly own Wadia BSN India Ltd., the original joint venture vehicle formed in the nineties. This company is largely non-functional and holds a nominal 300 shares in Britannia, but it is important because all the joint-venture powers are vested in it. In other words, the behaviour of the two partners is totally dictated by the joint-venture agreement that formed Wadia BSN. Danone is keen to get this agreement rescinded so that it can make an Indian foray independently.

Now, the ongoing dispute between the partners has more than one facet to it, but the bottomline is that Danone is straining at the leash to set up an independent dairy business in India. It needs permission for this from the Wadias as per government regulations, but the latter is unwilling to play ball and are invoking the Wadia-BSN agreement to deny permission to the French major for an independent entry into the country.

The dispute has manifested itself in several forms but the most interesting and important one is that related to the Tiger brand, which Britannia owns. The Wadias allege that Danone has registered the brand without its knowledge and consent in several countries including Indonesia and Pakistan. Danone’s defence is that the Wadias indeed were aware of it and some Britannia executives even assisted in the Tiger brand launch in Indonesia.

Britannia, which owns the Tiger brand, has sought the return of the brand and the issue is now a part of the negotiations between the estranged partners. Apart from this, there is another tussle on in court over the strategic investment of Danone in Avestha Gengraine Technologies, a Bangalore-based biotech firm. The Wadias contend that the investment is a violation of the Wadia-BSN joint venture agreement.

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