Case for Analysis: Management Buyout at Doshi Mechanics Ltd.

Adapted from: Mergers, Acquisitions and corporate Restructuring by P.G.Godbole : Vikas Publishing House Pvt. Ltd

The latest financial statements of Doshi Mechanics Ltd. were as shown below: (All amounts in` Crores) Balance Sheet as at end of 31 March 2012 Liabilities Assets Paid up Capital 5crore shares of face value` 10 each 50 Nett Block 50 General Reserves 50 Secured Loan @9% 12 Unsecured Loans @11.5% 8 Accounts Payables 50 Inventory 40 Accounts Receivables 80 TOTAL 170 170 Profit/Loss for the year ending 31 March 2012 Sales 100 Cost of Goods sold 50 Operations Profit 50 Selling and Admin expenses 10 PBDIT 40 Interest 2 Depreciation 5 Profit Before Tax 33 Tax @33% 11 Profit After Tax 22 Sales were stagnant but stable and profitable. Pre-tax annual cost of borrowing was just around 10%. Assets were productive but highly depreciated on books of accounts. Depreciation by SLV method @10% p.a. worked out only to` 3 crores this year. The company, started by veteran Praful Doshi and run by his disciplined iron had aided by significant risk-taking in early days. As he crossed his two-score years of life, he inducted professional management which had run the company well for over a quarter century. The company had gone public and listed, with Mr. Doshi finally retaining just about 40% of the equity. Mr. Doshi let the management take all operative decisions, but he had run out of his risk-appetite and was averse to taking up new businesses or higher debt. He was perfectly satisfied with the excellent RONW (return on net worth) of 22% and would force dividend payout of over 80% of post-tax earnings every year, giving himself a good cash-flow to support a nice personal lifestyle (including charity) but leaving little re-invested in the company for growth. Prafulbhais only daughter, Palak, was settled in California as a US citizen, running her own well-doing start-up in the internet space, which had just completed its second round of VC financing to the tune of US$900M. She had made it well-known that she was not at all interested in her fathers Indian company except for the steady cash-flow that came in as dividends on the few shares she owned. Doshi Mechanics Ltd. had a debt-equity ratio stood at 0.2:1 against an industry average of 1.5:1. Company shares were trading idly in the band of` 20-25, at a P/E ratio of around 5. The professional managers, especially Mr. Mehta, the Managing Director, was canvassing strongly for growing business even by additional leveraging and enter new lines of businesses promising good future growth unlike the current offerings which had matured in their lifecycle and showed no growth potential. However, the old man Prafulbhai would simply refuse to buy-in any of the newfound proposals brought up by Mr. Mehta, since as a

M&A, SemIII, Symbiosis IIB, Dilip Thosar, Sep.2012

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Case for Analysis: Management Buyout at Doshi Mechanics Ltd.

Adapted from: Mergers, Acquisitions and corporate Restructuring by P.G.Godbole : Vikas Publishing House Pvt. Ltd

septuagenarian, his priorities were not for business growth but for a stable cash-flow to see him through his remaining life. Mr. Mehta consulted Mr. Bhargav of the D.E.Shah Investments Ltd., a well-known investment banking firm. Mr. Mehta then decided that it would be best to take over the company along with other management colleagues, and take it to the next level of growth. Mr. Mehta estimated that Mr. Doshi would be very happy to exit at a price of` 35 per share, meaning a corpus of` 70 crores, that would clearly see good cash-flow even on low-yield safe passive investments assured through life, with no hassles of overseeing the company. A public offer for 1.75 crores of shares held by the public, @` 40 per share would surely enthuse enough response from the market where they were being traded @`20-25. The rest of the shares (1.25 crores) would be mopped up in a final offer with published de-listing at a 10% higher price (` 44). This would mean the total bill for the restructuring would come to almost` 200 crores. The high reinstatement value of the assets (almost the same as the gross block) made it feasible to negotiate debt till the debt-equity ratio reached 3:1. That would mean` 50 crores for the management team to raise and invest as their equity. An SPV by the name of Novella Holdings Ltd. would be formed with an equity capital of` 50 crores by issuing 5 crore shares @`10 per share to the new shareholders (management of Doshi Mechanics). D.E.Shah would mobilize` 145 crores by secured debt from various banks and funding agencies. The entire funding thus received would be deployed in acquiring shares of Doshi Mechanics Ltd. as planned above. The initial capital structure of Novella would then be as follows: (All amounts in` Crores) Balance Sheet of Novella Holdings post-acquisition Liabilities Assets Paid up Capital 5crore shares of face value` 10 each 50 Investments 195 Secured Loan 145 TOTAL 195 195 Doshi Mechanics Ltd. would then be merged with Novella Holdings Ltd. and the name of the merged entity would be changed to Doshi Mechanics Ltd. The new company would show the fixed accounts at re-instatement value of` 300crores. Any surplus would be accounted as general reserves. The secured loans on the old companys balance sheet would be refinanced. The post-merger balance sheet of Doshi Mechanics would be as follows: (All amounts in` Crores) Balance Sheet of Doshi Mechanics Ltd. post-merger Liabilities Assets Paid up Capital 5crore shares @ ` 10 face value 50 Fixed Assets Gross Block 300 General Reserves 155 Secured Loan 165 Accounts Payables 50 Inventory 40 Accounts Receivables 80 TOTAL 420 420 Mr. Mehtas colleagues in the management team of Doshi Mechanics, found this acceptable and excitedly started preparing for raising their personal funds. Mr. Mehta put forth the entire plan to Mr. Doshi for his acceptance.

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