Minority shareholders revolt against Watawala’s sale of marketing subsidiary

Minority shareholders are strongly objecting to Watawala Plantation Plc’s (WATA) proposed sale of its marketing subsidiary, the company’s cash cow, to majority shareholder Estate Management Services Ltd.
Their opposition is likely to be vehemently expressed today at the Extraordinary General Meeting (EGM) convened for shareholder approval.

Last month, WATA in a brief filing to the CSE said that the Board has resolved to dispose of the 100% owned subsidiary Watawala Marketing Ltd. (WML) for Rs. 741.6 million. The price was double the carrying value of WATA’s investment in the subsidiary, which was Rs. 355 million.
The rationale for the sale wasn’t disclosed and nor was the identity of the purchaser revealed in the CSE filing.
However, minority shareholders told the Daily FT that the WML was being sold to Estate Management Services Ltd. (EMS), which owns 54% of WATA. EMS is also the managing agents of WATA.
The timing of the sale by WATA is also questionable as the subsidiary was floated only in April 2010. Ironically, WATA Managing Director Vish Govindasamy told shareholders in the 2010/11 Annual Report that “WML has several ambitious plans drawn up for the coming year and is confident that this will be a key business unit in the future.”
In this context, minority shareholders have raised a host of issues against the proposed sale, which marks a U-turn of the management’s position.
One reason is that the valuation isn’t adequate considering the profit potential of WML and since selling it would also make WATA vulnerable, heightening overall business risk. The sale as it is proposed would also make WATA’s majority unduly gain at the expense of minority shareholders.
This view is substantiated by the fact that in the financial year ended WML contributed to 22% of WATA’s revenue of Rs. 5.6 billion and 35% of after tax profits of Rs. 642 million. In the first nine months of the current financial year the contribution has swelled to 26% of Rs. 4.6 billion and 114% of Rs. 145 million respectively. If not for WML, the company would have ended up in loss in 2011/12 financial year up to third quarter.
Minority shareholders emphasised that the entire sale isn’t in the best interest of the company.
On its part, WATA’s management has justified the sale, proceeds from which will be used to partly fund the gratuity liability, which is at Rs. 833 million, reduce the gearing level by partly settling and restructuring the long-term and other bank borrowings currently at Rs. 965 million. Via these measures WATA believes the core business of plantations, inclusive tea, rubber and palm oil, will be strengthened.
Nevertheless, analysts have opined that WATA’s modus operandi is sub-optimal and lacks credibility in terms of fully achieving the objectives apart from angering minority shareholders. They also emphasised that both the company and minority shareholders would benefit if WATA were to raise funds by listing the subsidiary.
Another thorn in the sale is alleged conflict of interests. The parent EMS is a joint venture between Sunshine Holdings Plc (51%) and Tata Global Beverages Limited (49%).  Both EMS and WATA have several common directors and the sale exposes a conflict of interest with regard to the Director Board’s role in the transaction as they represent both buyer and the seller.
This conflict of interest has prompted minority analysts to suggest that valuation on WML could have been biased.
As per the current arrangement, EMS effectively holds 53.75% of WML and if the sale goes through, WML becomes the wholly-owned subsidiary of EMS, increasing the profit potential for the EMS.
Analysts pointed out that given the profitability of WML, EMS is expected to recover its investment in a shorter time period, through WML’s profits and by way of management fees from WATA at the expense of the minority shareholders of WATA.
The key business activities of WML are primarily marketing of branded tea under Zesta, Watawala Kahata (which is the second largest tea brand in Sri Lanka) and Ran Tea, vegetable oil under the brand Oliate, bottled water under the brand Zest, and operation of the gift boutiques (The Tea Cup). 
WML is a complementary business that reinforces the core business while reducing overall business risk.
WATA has 18,240 shareholders of which over 96% fall in to the category of owning less than 5,000 shares having a collective stake of 10%. Golden Shareholder is Treasury. WATA Group has been posting a profit for the past eight consecutive years with a high of Rs. 642 million in 2010/11 and lowest of Rs. 75 million in 2008/9.