French stationery major BIC Group has exercised the call option to raise its holding in seven entities under domestic stationery major Cello Group from 40 per cent to 55 per cent for Rs 280 crore ($45 million), as per a company disclosure.
The deal will make it one of the strongest players in the fragmented stationery market in the country.
BIC recently completed the delayed transaction of the first leg of the acquisition, first announced over four years ago.
The deal, announced in January 2009, involved BIC acquiring 40 per cent stake in seven entities representing writing instruments business of the Cello Group for Rs 790 crore or overall valuation of Rs 1,975 crore (€310 million or $402.5 million) back then. Cello was founded in 1995 by the Rathod family.
The French firm completed stake purchase of 40 per cent in six of the seven entities for Rs 380 crore. However, in January 2010, Cello management proposed to BIC to unwind and terminate the definitive agreements signed the previous year. BIC declined to do so and initiated international arbitration proceedings in August 2010 to complete the acquisition of 40 per cent of the seventh entity namely Cello Pens, the flagship unit.
BIC received a favourable award in February 2012 from the tribunal constituted under the rules of the Singapore International Arbitration Centre for the pending leg of the stake buy in Cello Pens. Following this, it filed a petition before the Bombay High Court seeking the enforcement of the arbitral award in May last year. The two partners recently completed the transaction where BIC picked 40 per cent of Cello Pens for Rs 370 crore ($59 million).
The French group also holds call options to raise the holding in the group firms in tranches up to 90 per cent by 2017. As part of the agreement, it has now exercised the option to raise the holding in all seven entities to 55 per cent. This is expected to be completed before the end of this year.
“Cello Pens brings opportunities to accelerate our group development in India, as well as in other parts of Asia and will generate long-term value," said Bruno Bich, chairman of BIC Group.
"The exercise of the call option allows us to increase our stake in a highly successful company focused, like we are, on delivering the highest quality products to consumers and that will contribute to BIC Group’s long-term growth," said Mario Guevara, CEO of BIC Group.
BIC can further raise its holding to 75 per cent next year and eventually to 90 per cent.
At the heart of the deal lies the flagship firm Cello Pens, India's largest manufacturer and distributor of writing instruments with approximately 28 per cent of domestic pen market and a presence in Africa, the Middle East and Asia.
For the year ended March 31, 2012 Cello Pens had net sales of Rs 550 crore with an EBIT margin of 25 per cent. This has grown from Rs 410 crore revenue and EBIT margin of 30 per cent in FY09, which implies the margins in the business has shrunk.
The deal to buy 40 per cent entailed a total investment of Rs 750 crore and with the proposed deal to raise holding to 55 per cent it would push overall investment value for BIC to Rs 1,030 crore.
Based on the current valuations, BIC would need to shell out over Rs 370 crore next year and around Rs 280 crore more in the future to raise holding to 90 per cent. Future stake purchase value, however, is linked to earnings.
(Edited by Joby Puthuparampil Johnson)