In today's Finshots we discuss how Vedanta managed to take over Videocon for an absolute bargain


The Story

Before we get to the story, a brief introduction on how Videocon went from being pioneers to defaulters.

In 1986, three brothers started a company — Adhigam Trading. They were selling paper tubes at first. But then, they began diversifying rapidly — manufacturing TV sets and washing machines. In fact, they were the first Indian company to acquire a license to manufacture color TVs. But they didn’t stop there.

By 1990, the company was adding products like air conditioners, refrigerators, and home entertainment systems to its offerings. In 1991, they rebranded to Videocon, and the company became one of the most iconic consumer electronics brands in the country.

But the brothers had bigger dreams.

They began exploring uncharted territories and set up businesses in Oil and Gas, Telecom, Retail, and DTH services. Unfortunately, these new businesses didn’t work out all too well. They were capital intensive and didn’t generate a lot of money. The firm’s debt began to spiral out of control. And finally, Videocon was admitted to the bankruptcy court (NCLT) in 2018. The claims against the group’s companies, Videocon Industries, and Videocon Telecommunications, added up to a whopping ~₹71,000 crore.

It was one of India’s largest bankruptcy cases ever.

Soon enough, the lenders got together to resolve the matter within the framework of India’s Bankruptcy Code (the IBC). But it was no easy task considering they had to value 13 different group companies belonging to Videocon. There was a lot of confusion at first but eventually, the registered valuation experts came up with two numbers.

A liquidation value of ~₹2,500 crores and a fair market value of ~₹4,000 crores.

Now right off the bat, even if you have no clue what these two values actually mean, you know the lenders are getting screwed over. They were claiming ₹71,000 crores in total and yet, the valuation experts were saying that the group companies were barely worth anywhere between ₹2500 crores and ₹4000 crores. It was a terrible proposition, to begin with.

But then, things get worse.

The liquidation value here is the absolute minimum you could expect. Imagine you were selling Videocon on a piecemeal basis — Getting the assets ready and auctioning them off one at a time. It’s a fire sale number and not a fair representation of what the assets may be worth to someone who could potentially put them to better use. This detail is captured by the fair market value. And while there’s not a lot separating ₹2,500 and ₹4000 crores, you still want to get close to the latter figure. You want the fair market value.

However, in this particular case, the winning bid came in at ~₹2,900 crores. It came from Twin Star Technologies, a promoter entity of the Vedanta Resources group. And the judges presiding over the case seem to have noticed something was amiss about the whole thing. See, once the valuation experts come up with a number, it is generally expected to stay confidential. Imagine Vedanta knew what the liquidation value was. You’d then expect them to offer a bid close to that figure. But if it stays confidential maybe they’ll bid higher.

However considering Vedanta threw a number pretty close to the actual liquidation value, the judges were a bit sceptical on whether the confidentiality clause was violated in some respect. More importantly, they were worried about how the lenders were getting a paltry sum in return.

~4% of all admissible claims — A truly pitiful number.

And you know who got bulldozed completely here? The operational creditors — suppliers who worked with Videocon. These guys were owed over ₹1000 crores and yet they’re only getting about 0.72% of what they were owed. As the judgment noted  “the Successful Resolution Applicant is paying almost nothing and 99.28% hair cut is provided for Operational Creditors (Hair cut or Tonsure, Total Shave)”

It is a total shave, alright.

And while the judges requested Vedanta and the lenders to offer these small companies some respite, they couldn’t overturn the resolution entirely because the lenders settled for this number. They complied with the law fully and the resolution had to go through.

As for Vedanta, they got what they wanted. Granted, Videocon is a shadow of its former self, but it does own something valuable. The beleaguered group owns a 25% stake in the Ravva oil field — located in the Krishna Godavari Basin, coastal Andhra Pradesh. That is what piqued Vedanta’s interest in Videocon in the first place. They already owned some stake in the oil field but now after the Videocon gambit, they own 47.5% of the asset. In fact, they will be the biggest stakeholder in the oil field ahead of ONGC.

So yeah, with this, we have another successful bankruptcy resolution. But at this point you have to ask yourself — If this is what success looks like, where are we really headed eh?

Until then…

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