Henkel deal not done yet, will make strategic sense: Jyothy Labs

Global consumer goods giant, Henkel AG, is likely to exercise its option and invest in Jyothy Laboratories, a Business Standard report today said. As per the option agreement, Henkel can buy up to 26 percent stake in Jyothi and the deal will have to be exercised before March 2017.

Speaking to CNBC-TV18 in an interview, K Ullas Kamath, Joint MD and CFO of Jyothy Laboratories said the deal was not yet done but, if it were to go through, it would be a "strategic" investment rather than financial.Price at which stake can be bought will be decided mutually and it cannot be less than Sebi guidelines, he said.

The deal could take place through issuance of fresh shares or promoters selling their stake or a combination of both, Kamath added.

Below is the transcript of K Ullas Kamath’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Sonia: Can you confirm for us whether this news report is accurate and has Henkel indicated to you a timeline on when they would like to increase or rather invest into your company? A: Henkel has an option as we had told the press, when they had asked the question whether Henkel is going to exercise, they do have the option to exercise before March, 2017. And yes, it is a long window what we have given to them because a lot of negotiation has to happen, it has to take place. But beyond that, at this point, I will not be able to confirm or to deny because it is just an option what they have and which we gave five years back when we acquired that business. And it is for them to bring their products into India and they want to bring their foodstuff back into India, this is all what we can say. But there is an option for them to invest and that is the fact. Latha: What is the arithmetic of the option? At what price? A: Price to be negotiated mutually between the parties. Price has not been agreed upon. It is an intent for them the option is given to invest in Jyothy at a mutually agreeable price and that is the reason why we have kept a long window for them. Latha: But that does not make sense. Anybody has the option to buy Jyothy Lab share from the market. If you have given them an option, it will be under some conditions. Will it bear some relation to the last five year price, last one year price or will it be just governed by the Securities Exchange Board of India (SEBI) formula? Is it a first right of refusal? There must be some condition. A: Absolutely you said it right and it will be a price mutually agreeable to both the parties. However, such price cannot be less than the SEBI guideline price. And also, what they need to bring to the table is very important. They are not going to be a financial investor, they will be strategic investor, because they are the world’s second biggest fast moving consumer goods (FMCG) player, so they also would be interested in seeing what kind of a synergy we can create between both of us. So, the price is not something, it is not the only factor which they see or we see, but it cannot be less than the SEBI guideline price. Sonia: At this juncture, are you only speculating that they are going to increase their stake because you cannot confirm or deny it and as you mentioned, the option was given to them five years back, so are you having any conversations with them currently, or are you just speculating that they would come and increase stake? A: I am not speculating, definitely that word is not correct. All I am saying is that we are keeping the facts before everybody that they have an option which everybody is aware of that. And in the past, I had told that this is open only from April 1, 2016 to March, 2017 when the press reporter asked me that the window is open, I said the window is open and whatever explained, I have explained. Sonia: But have you had any conversations with them? A: I will not be able to comment because it is something which not fair on my part. Latha: So you are saying that the option opened only in March, 2016? A: Yes, April 1, 2016.’ Latha: And that option extend up until 2017. A: Absolutely. Latha: And they have to buy a minimum of 26 percent stake is that the understanding? A: Up to 26 percent, not beyond 26 percent. Latha: That kind of an option, why Hindustan Unilever can have if they come to a very good understanding with you. Anybody can have that kind of an understanding. What does Henkel have special? A: Because that was part of the negotiation that was what we had when we had bought out the entire business of India. That was a give and take and they wanted to stay in India and that is the reason they said that can we have a portion of Jyothy Labs. At that point in time, we said no, we will not be able to give now, we will give after five years and that is how we made, that was the document. Latha: I agree, but is it an offer you cannot refuse? What are the conditions of that offer, is what I am trying to get at? A: It is an offer, either party can refuse if it is not accepted on the pricing front, or in terms of product what they intend launching if it is going to compete with our existing product which will be there part of it. So, that is why it is called an option agreement subject to agreement of both the parties. However the pricing cannot be less than the SEBI guidelines at that point in time, is the agreement and we will stick to that. Sonia: Can you tell us hypothetically if Henkel does re enter into the company, what could the synergies be and how could it change for Jyothy considering that Henkel will come with a lot of international experience? What kind of revenue growth would expect to see over the next two to three years? A: Very difficult to estimate that, however we can say that when we got the sale in our hands and the business has already doubled in the last four years and a lot of good things have happened and their products if they can bring into India, will become much more meaningful player in FMCG space and that is what we are looking at from our side. Latha: If at all they exercise the option, will it be a fresh issue of shares? A: It could be a combination of fresh issue of shares it could be a combination of a bit of promoters who are selling out. It is a combination, it is what we have agree also. It is not only a dilution, it would be a bit of promoters leaving also, it is a combination of both, if at all it happens. Latha: And at the moment, Henkel has any seat on your board? A: As of now, no. But, they are on invitee, permanent invitee on our board. Latha: Two people are permanent invitees right? A: Yes. Sonia: You said that there is an option of promoter diluting its equity as well. Currently the promoter holding stands at about 67 percent. How much are you willing to dilute to a maximum. A: That the promoters have to tell and not me, but at this point in time, a combination is what we have agreed upon in agreement also, so I will not be able to discuss on that. Latha: But if they take 26 percent, they have to make an open offer. A: Absolutely, they need to make an offer, that is why it is written as up to 26 percent.