Gati Ltd’s stock price crashed 10 per cent to hit the lower circuit of the day after it announced a deal with Japanese logistics firm Kintetsu World Express (KWE) to sell 30 per cent stake in its express distribution & supply chain (EDSC) business for Rs 267 crore ($53 million).
The EDSC business comprises majority of Gati’s revenues and thus explains the response of the investors who dumped the stock on Monday.
For the 12 months ended June 30, 2011, Gati drew three-fourth of its total consolidated revenues of over Rs 1,200 crore from the EDSC business. More importantly, over 95 per cent of the segment profits came from the EDSC business, which is now hived off into a separate venture. Other businesses of Gati include what it calls ‘coast-to-coast’ (shipping) besides fuel sales. These two businesses generated around Rs 220 crore in revenues, with segment profit of Rs 2.5 crore.
The proceeds of the transaction will be primarily used to reduce debt, the company said.
The new joint venture will support the large customer base of Kintetsu which has operations in India – simultaneously strengthening its distribution capabilities for the Indian market. The JV will also invest in high-end 3PL facilities, including temperature-controlled warehouses.
On the Bombay Stock Exchange, shares of Gati Ltd closed at Rs 41.90, down 9.99 per cent from the previous close.
“The partnership will help us leverage KWE’s (Kintetsu) global customer base, develop world-class infrastructure capabilities, enhance our distribution services and further strengthen our leadership position in India,” said Mahendra Agarwal, founder and CEO of Gati Ltd.
KPMG Corporate Finance was the exclusive financial advisor to Gati while Systematix Capital Services Pvt Ltd was the buy side advisor to Kintetsu.
“The partnership with Gati will enable KWE to further expand and strengthen its global operations, with the Indian market increasingly growing in size and importance,” Satoshi Ishizaki, CEO of KWE, commented on the acquisition.
Kintetsu is a $3.5 billion company, engaged in domestic and international freight forwarding, custom clearance, supply chain solution and domestic distribution services. It has operations in 32 countries across East and South-east Asia, the Middle East, the Americas, Europe, Africa and the Oceania.
The JV will be named Gati Kintetsu Express and under the JV, Gati will hold 70 per cent stake and the balance 30 per cent will be held by KWE. The deal values the EDSC business at Rs 890 crore, over 9x its last year’s segment profit.
Gati scrip last traded at Rs 41.9 a share, valuing the parent company at Rs 362 crore.
Had Kintetsu acquired the same stake in Gati, it would have been necessary for the company to come up with an open offer to buy other minority shareholders that could have given it a majority stake. Apparently, the market was expecting a deal to that effect and the company’s share price had doubled in the past six weeks. But the current structure makes it a different kind of deal where an acquirer is buying a large stake in the most lucrative part of a public-listed company’s business without having to come up with an open offer for the minority shareholders.
In the past, there had been a string of similar deals involving public-listed companies where acquirers bought the bulk of public firms while circumventing the need for a mandatory open offer.
In another deal in the logistics space, India Equity Partners (IEP) had recently acquired the domestic road operations of Dutch freight & logistics giant TNT Express in India for an undisclosed sum, in one of the rare control deals in the Indian private equity market.