Behind Noel Tata's contrarian bet Down Under
17 Nov, 2007, 0157 hrs IST,MV Ramsurya and Kala Vijayraghavan, TNN
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Global cross-border frenzy may have enveloped India Inc, but one sector has understandably stayed away from the limelight: the retailing industry. Yet unknown to the world, a group company from the $22-billion Tata group made a seemingly audacious bid for the Australian-New Zealand business of Borders group, the world’s second largest books and music chain in the world.
For more than seven months, the Tata firm competed with a range of private equity firms and local book chains right through to the final stage where they were among the final three bidders left in the fray. Right through this four-month-long bidding process, nowhere did the Tata group’s name figure in local and international media reports.
Perhaps it may have been because the deal had been managed entirely by Tata group’s crack in-house team led by their director and sharp shooter Arun Gandhi. On Thursday evening, news finally trickled in that Trent, managed by Ratan Tata’s half brother Noel, had been pipped to the post by a local private equity firm, Pacific Equity Partners, which also owned Australia’s largest book chain, Angus & Robertson.
Even today, inside Trent, the bid for Borders remains a tightly-held secret known only to handful of senior executives. An official Trent spokesperson told ET, “We are currently not bidding for any business in Australia.” Most local retailers in India expressed surprise when told that the Tata firm had even gone ahead with the bid — at a time when the rest of the world had their sights on India. So what prompted Noel Tata to sight an opportunity Down Under? And more importantly, how much sense did it really make?
But first, let’s get some useful background on the deal. In the world of books and music retailing, Borders remained an aberration. While its global peers like Barnes & Nobles, WH Smith and Japanese retailer Kinokuniya had concentrated on building a local business, Borders decided to expand its international business a decade ago, setting up stores across the developed world including UK, but also in the Middle East, Singapore, Malaysia, Australia and New Zealand.
And then its brick-and-mortar business began to face a sluggish home market in North America. There was also stiff competition from web discounters like Amazon and warehouse chains like Costco Wholesale who sell various goods in addition to books. “These discounters are able to offer books at far lower prices and offset the lower margins with higher margins on other products,” said a CEO of a rival retail chain in the country.
The Borders board, in its global HQ in the US, decided to gradually withdraw from the rest of the world and use the same resources to consolidate its operations in the home market. It would instead rely on a franchise model which did not guzzle too much capital — something it had tested in Malaysia and UAE. So Borders began selling its operations bit by bit, first in the UK, and then gave the mandate to dispose of its 20 stores in Australia and another four in New Zealand in March this year to KPMG.
According to people close to the Tatas, the decision to bid for Borders may not have come about all of a sudden. Trent had been nurturing aspirations to grow its wings across Asia — except that very few in the retail industry knew about it. Unlike his high-profile peers like Kishore Biyani, BS Nagesh and now, the Reliance group, Trent CEO Noel Tata preferred to stay out of the limelight.
A senior consultant working at KSA Technopak, though, recalls Noel Tata outlining his plans to expand in the region, especially China, Middle East and South East Asia during a relationship meeting last year. “We never quite figured that one out. Why would they want to expand overseas even before they dug in their tentacles in their home base?” he says. Yet Trent saw an opportunity in Borders that no one else in the retail industry in the country did.
Their logic was simple: Trent was present in three categories: Apparel through Westside department store chain, groceries through the Star India Bazaar hypermarket format and books and music through the Landmark chain (in which they had acquired 76% stake in 2005). “Our sense was that it would not be possible for us to emerge as strong local or even Asian players in the first two categories. But we sensed that the Borders deal offered us a platform to grow into a relevant and big player at least across Asia,” said a senior executive from the group’s HQ in Bombay House.
The rationale
There were four important factors that Trent also considered. One, the Australia-NZ operations were profitable and growing at nearly 26% every year. Besides, Borders was willing to license their brand name to whoever clinched the deal. Two, since Borders was withdrawing from the Asian sub-continent, there was every likelihood that they would also put their Singapore store on the block. The 32,000-sq ft store on Orchard Road was a jewel in the crown. It registered $40 million in sales annually and besides, Tatas heard that there were plans to open one store in the city state.
Three, if the ANZ deal fructified, there was every chance that Borders would eschew a public bidding process (given the high fees it would have to fork out) and look at a private placement to a strategic partner, ergo, the Tatas. Four, the $1.2-billion Australian books and music market seemed in fine fettle.
Their own experience with their SUV Safari had proved it as well, with sales outpacing that in the UK. With that intent, the Tata group began to figure out how to structure the transaction, purely as an offshore buyout, without taking recourse to Trent’s balance sheet. Very few Indian companies had done complete offshore buyouts in the past. Even mega deals like Corus and Novelis had relied on partial recourse to the acquiring company’s balance sheet. The core team contacted some private equity groups and funds with specific domain expertise in raising funds overseas.
Initially, when the process was kicked off, it attracted enough media attention. After all, Borders had a 10% share of books and music retailing market in Australia. According to reports in the local media, local retail chains like Woolworths (which had partnered Tata Infiniti for its foray into the Croma consumer electronic store chain) and Dymocks showed interest, as did private equity firm Pacific Equity Partners (PEP).
Now, PEP was always considered the front-runner, because it wanted to combine its A&R business with that of Borders and thereby end up controlling one-third of the market. It then had plans to float the combined entity on the share market in the next 12 months.
Before the final bids were placed, KPMG put out an information memorandum in end July, offering more information on how the 24 stores were performing. Reports at that time in the local media put the valuation at over $100 million. In the end, only three suitors remained in the fray: PEP, Dymocks and the Tatas.
It wasn’t until Thursday evening that the final results were known. So far, Borders hasn’t put up any official confirmation, but Tata sources say PEP’s winning bid is likely to be around $125-130 million.
What now?
The Tatas may have lost their bid for Borders, but their contrarian gameplan is bound to set the cat among the pigeons in India’s fledgling retail industry. A top retailer grudgingly admits that Trent’s gameplan was unique — and worth mulling over.
Despite all the frenzy around India’s retail opportunity, the incumbents are today faced with rapidly escalating real estate prices that are forcing margins to head southwards. In such a scenario, a global approach may make suitable sense, says another leading retailer. Besides, company watchers say Trent tasted blood with the success of Landmark.
“Trent searched hard for local acquisitions before deciding to search outside India. There are not too many brands available for acquisitions in this space in India. Through such global acquisitions, Trent could get access to talent, a ready brand and back-end support. Not to forget a ready market globally,” said a top official in an investment firm, which advises retailers on such acquisitions.
Within the group, sources said several meetings had been held on evolving an out-of-the box approach. The feeling was that there are too many competitors vying for space and customers within the country. “With their experience in steel and auto, Tata officials saw no reason to ignore global retail opportunities especially when competitors were looking inward,” said a top official.
Of course, not everyone thinks the Trent plan had merit. “There is obviously some strong logic and reasoning there. Maybe, we do not think that way. The challenges and opportunities within India are too immense to be exposed to global ones,” said the CEO of a top Indian retail company. “So far, retail learnings suggest that the most successful retailers have always been local,” said an expat CEO of a retail firm. But at least, the Tatas are thinking big and differently, he adds.
Edited by vishal.sahay - 17/Nov/2007 at 4:32pm
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