The RKHS-Sodexo deal breaks a myth - BMR Advisors

M&A in tough times: The RKHS-Sodexo deal breaks a myth
Source: Moneycontrol
March 17, 2009
Author: Bobby Parikh
A few days back, Radhakrishna Hospitality Services (RKHS) sold its facilities services management
business to French giant Sodexo for about Rs 600 crore. The transaction busted three merger & acquisition
(M&A) myths in the country: there there are no buyers in the world right now, sellers would wait till prices
move up before they sell and that Indian promoters never sell.
Talking about the deal, Raju Shete, CMD of RKHS, said the company is going for reorganization. He further
stated that the company game plan now is to be able to focus on the supply chain distribution, logistics and
wholesaling business which is the food line business, which it’s currently scaling up.
Bobby Parikh, Managing Partner of BMR & Associates, the firm that advised Mr Shete on this transaction,
said this was not a financial transaction in itself. “Sodexo is a global leader in the industry in food services
and facilities management and RKHS is a leader in India in the same business. So this was a transaction
which was driven and guided very substantially by overall strategic considerations and in that kind of a
context, the timing is less of an issue and many of the considerations that are otherwise applied to
transactions become less in more strategic transactions.”
Q: They say that Indian promoters never sell out but you did, they say that valuations are very low
and no one wants to sell right now but you did. You want to comment on the timing of this
transaction and why you chose to sell at a time when most people seem to be holding on to their
stake hoping that next year will probably bring them better prices
Shete: I think the sole reason was that we were going through reorganization ourselves. We are in multiple
businesses as a group and one of the things that we wanted to actually ensure is that in this whole
environment that currently exists is to refocus, realign and have allocation of resources which is the key
thing today to succeed and more importantly the focus. So our whole game plan now is to be able to focus
on the supply chain distribution, logistics and wholesaling business which is the food line business which we
are currently scaling up.
Q: Why did you chose not to sell out on that business, was it that odexo was not interested or you
chose to retain that business
Shete: I think every business has its cycles, every business has its growth related issues and challenges.
More importantly that business is a subset of the front-end call it food services or food retail and we believe
that that business is probably the most relevant as far as India is concerned in terms of its growth
opportunities. Also having faced all the challenges so far in that business and now being able to put that to
work over the next five-seven years, just look straight forward and at the same time extremely interesting to
be able to scale it to a different level.
Q: I am told that this transaction was almost a year in the works, this is pretty curious timing
considering that across the world buyers are either waiting for prices to get worse or sellers are
waiting for prices to get better, how you all managed to strike it finally after a year of negotiations
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Parikh: This was a different situation as far as the transaction was concerned because this was not a
financial transaction in itself, Sodexo is a global leader in the industry in food services and facilities
management and RKHS is a leader in India in the same business. So this was a transaction which was
driven and guided very substantially by overall strategic considerations and in that kind of a context, the
timing is less of an issue and many of the considerations that are otherwise applied to transactions become
less in more strategic transactions.
Q: Were there other people interested as well or was this an out-an-out negotiated transaction with
Sodexo or were you talking to other players maybe not just in the food business but even private
equity players or things like that
Parikh: There were a number of different options that we were looking at over a period of time and this one
happened to be something which met Mr Shete’s objectives and RKHS’s objectives and also Sodexo’s
objectives. So in the end, this was the one arrangement which worked well.
Q: Also comment on the price, it seems to add up to about little over one time revenue for the
business that Mr Shete has sold now. I don’t think there are benchmark such deals anywhere else in
India because we haven’t had a company like RKHS in India do a transaction like this, how does this
compare globally
Parikh: It is a fairly competitive valuation and we looked at a number of different metrics and I think that on
the whole we think that the transaction was reasonably priced. We would of course have liked to have more
but I think in fairness it was a good transaction.
Q: Why didn’t you hold out maybe six-nine months down the line, you might have got even more
Shete: We can always look back in hindsight and say this could have been possible or you could have got
high valuations.
Q: This is a particularly bad times for the global markets, valuations everywhere are at an all time
low so weren’t you hopeful that maybe next year same time you would have got a better valuation
Shete: That thought will always remain with me but I think what is most important for me was that the
opportunity that is coming up on the food distribution logistics, supply chain end is substantial. We just have
to understand that you don’t have unlimited resources and you have to align yourself at some point and I
think this was not timed in a manner of speaking but I thought that it was the right time, it was fair, one could
have always thought that you could have got something more but I think that was a consideration but that
was not the only consideration.
Q: I also understand that there are some reports that you are looking for financing for many months
and couldn’t quite come upon the right terms for that financing, so is that what in a sense forced
your hand to sell some part of your business and thereby raise money to finance the rest of your
business where you seemed to think the future lies
Shete: I think if you look at the options that are available, I think there are only three-four which see the
private equity, its debt or it strategic or it is a combination of ‘either – or’. I think when you weigh all those
options from a timing perspective or from a value perspective, one has to pick up the best options and this
option that came along was probably the best suited from an RKHS’s standpoint and that is what helped you
move forward and concluded.
Q: You have about Rs 600 crore, much of that now gets invested in the remaining part of the
business which is the supply chain business and maybe even the retail front-end, what have you
decided to do with retail
Shete: I think retail as a business was never our intent. I think we were kind of exploring that opportunity
and retailing for a time to come is going to be very difficult in my opinion from a business model perspective.
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Q: You are definitely exiting retail, so what do you do with this Rs 600 crore, are you looking at only
organic growth for the supply chain business when it comes to food, are you also looking at maybe
going out there and becoming a buyer yourself if there is anything to buy
Shete: I think we will just focus on the wholesale supply chain distribution; logistics business is a huge
opportunity in this country. I think we will be focused on what we know best which is food, services, logistics
and be able to do something which is pioneering and at the same time gaining leadership in that particular
area through better focus and resource allocations.
Q: Is there any way to extrapolate this transaction to gauge a larger M&A mood in this country
There are many experts who say that this is the best time ever for companies to consolidate, there
are others who say that because of the valuation trick, many buyers are holding out for lower prices
and sellers are holding out for higher prices, so does this deal mean that we can see many more
promoters look to exit in difficult times like this so that they can maybe finance other parts of their
business
Parikh: I don’t know if an extrapolation is entirely appropriate; Mr. Shete’s circumstances were Mr. Shete’s
and I don’t know that they apply equally for everyone. But I think that it is only a matter of time. I think the
environment will become probably more conducive to more transaction certainly consolidations, strategic
acquisitions and hopefully we will see more of that happening over a period of time.
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