Lilliput Promoters Looking To Bring New Investor To Buy Out TPG, Bain

21 October, 2011

The promoters of kidswear company Lilliput Kidswear Ltd are looking to bring in new investor(s) in the company after a bitter legal spat with their existing high profile private equity investors TPG and Bain Capital threatens to derail the firm’s short-medium term fundraising plans.

“The promoters are looking at various options to come out of the mess including an out-of-court settlement with the PE investors, besides getting new investors on board who can replace TPG and Bain,” said a source privy to the developments and spoke on condition of anonymity.

Lilliput Kidswear hit the headlines this month as its private equity investors took the unusual step of not approving the annual accounts of the company in a board meeting held in September. The incident also cast a doubt on a proposed initial public offer (IPO) that would have helped the company to raise fresh cash.

The investors have alleged that the company has not maintained proper accounts while the promoters, led by Sanjeev Narula, have counter-alleged that the PE firms are looking to take over the control of the firm and are looking to derail the public issue as they do not want to dilute their shareholding. When contacted, Narula declined to comment as the matter is sub-judice.

A Bain Capital spokesperson said, “We have no comments to offer.” An e-mail query sent to a TPG spokesperson did not elicit any response either till the time of posting this article.

What Went Wrong?

The story had similar strains witnessed in a typical PE transaction in India where investors try to get closely involved in the operations while the promoters are not too keen to deal with such interference.

Bain Capital and TPG had bought a large minority stake in Lilliput Kidswear last year for around $86 million, partly through a secondary transaction with previous PE investor Everstone Capital. This was a high profile transaction as two buyout giants invested in a fast-growing company with a consumer-facing business in a deal brokered by advisory major Ernst & Young.

According to a person with direct knowledge of the developments, the representatives of the PE investors were frequently seen in Lilliput Kidswear office, “They used to be there 2-3 days in a week and also used to frequent Lilliput retail stores.”

The person added that the investors and the promoters had approved a plan to go ahead with a proposed IPO in a board meeting on September 23. However, after a separate meeting scheduled for September 28, the investors, along with the independent directors (who abstained from the meeting), resigned from the board. The investors alleged that they had received a series of anonymous calls on September 24, 25 and 26, which raised doubts on the credibility of the company’s financial statements.

Thereafter, Lilliput filed a case against the PE investors in Delhi High Court on October 3, seeking an ad-interim relief to stop them from obstructing the operations of the company or harming the image of the firm. The court restrained the PE firms “directly or indirectly, from acting contrary to the minutes of the Board Meeting dated 28.09.2011” and forbade the investors from giving adverse publicity to Lilliput.

According to a media report, the two PE firms, in their reply to the Delhi High Court, have asked for a forensic examination of Lilliput’s accounts and also sought to appoint a different auditor to investigate the financials of the firm.

What Next?

Besides the plans to get new investors to buy the existing PE firms, the promoters are also looking to reconstitute the entire board. This is expected to be done in early November.

The key problem facing Lilliput is to manage its relationship with the financial institutions. “Right now, the company has sanctioned debt limit of around Rs 200 crore from its bankers but the lenders have apparently frozen the arrangement, given the developments. However, it is natural in such circumstances,” said the source.

The obvious step for Lilliput promoters is to bring on board new independent auditors to verify the accounts. “One can expect Lilliput to make its moves soon after the Diwali holidays are over next week,” said the source.

The developments have also pushed back the proposed public issue of the company that could have hit the market during the next few months.

“As of now, the earliest that the company can look at an IPO is the end of next year as the allegations of financial irregularities are serious and market regulator SEBI will take a special look at the prospectus of the firm as and when it decides to file its draft red herring prospectus for the issue,” said the source.

The acrimonious turn of events may cast a cloud over any future fundraising and the case is being closely watched by limited partners (LPs) as there are big names involved in the case.

 


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2 Comments
Praveen Menon . 5 years ago

There is a lesson to be learnt here. When the Liliput transaction got done, everyone was questioning the ridiculously high valuation that Bain and TPG paid. They must have thought that they will go in and “get involved in the business” and improve performance yada yada…. I think the sooner int’l PE funds realize that Indian promoters do not appreciate “undue interference” in their businesses, the better. Also, if you (as a PE investor) is paying over the top valuations, better be sure you are clear how you are going to get your returns. Performance improvement cannot be a thesis for investment. At best, it can be potential upside.

Rupa . 5 years ago

Which investor in their right mind will come into this messy situation? Looks like a writeoff for the existing investors

Lilliput Promoters Looking To Bring New Investor To Buy Out TPG, Bain

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