2/26/2019 Impact

Assessment of
Corporate
Restructuring

NASIF MUSTAHID
SABYASACHI BHATTACHARJEE
RUPAM SAJJAN
BA.LLB(H) SEMESTER 8
 ACKNOWLEDGEMENT

We would like to express our special thanks of gratitude to our Mergers &
Acquisitions teacher, Mr. Ranjeet Mohanty, who gave us the golden opportunity
to work on the topic: “Case Study on Arvind Mills Ltd”. We came to know about
so many new things and we are really thankful for it.
Secondly, we would like to thank our friends who have helped us a lot in
finalizing this project within the limited time frame.

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 ABSTRACT

The case provides an overview of the Arvind Mills' expansion strategy, which
resulted in the company's poor financial health in the late 1990s. In the mid-
1990s, Arvind Mills undertook a massive expansion of its denim capacity in spite
of the fact that other cotton fabrics were slowly replacing the demand for denim.
The expansion plan was funded by loans from both Indian and overseas financial
institutions. With the demand for denim slowing down, Arvind Mills found it
difficult to repay the loans, and thus the interest burden on the loans shot up. In
the late 1990s, Arvind Mills ran into deep financial problems because of its debt
burden. As a result, it incurred huge losses in the late 1990s. The case also
discusses in detail the Arvind Mills debt-restructuring plan for the long-term
debts being taken up in February 2001.

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 ARVIND MILLS LTD.

Background
Arvind Ltd is the largest cotton textiles manufacturer and exporter in India. The
company’s principal business consists of manufacturing and marketing of denim
fabric, shirting fabric, shirts, knitted fabric, and garments. The company has the
rights to market international brands such as Lee, Wrangler, Arrow and Tommy
Hilfiger in India. The company has also owned popular brands such as Newport,
Flying Machine, Excalibre and Ruf & Tuf. They are having their production
facilities at Ahmedabad, Mehsana, Gandhinagar in Gujarat, Pune in Maharashtra
and Bangalore in Karnataka.
Arvind Ltd was incorporated in 1931 as Arvind Mills Ltd by three brothers
Kasturbhai, Narottambhai and Chimanbhai. In 1934, they established themselves
amongst the foremost textile units in the country. They are the first company to
bring globally accepted fabrics such as denim, yarn dyed shirting fabrics &
wrinkle free gabardines’ to India in the year 1986. It has tie ups with HI Lee and
Cluett International, US, manufactured denim jeans and Arrow shirts
respectively. The Denim project went on stream in 1991. The company produced
1600 million metres of denim per year in 1991 and became the third largest
producer of denim in the world. It is currently the 5th largest denim manufacturer
in the world.
AML’s tie-ups include it’s technical and marketing alliance with FM Hammerie
Von-Ogensver Waltungs, Austria, the US based Alamac Knit Fabrics & Spinners
and Webexi Diet Turt, Switzerland. Other brand portfolios are Flying Machine,
Ruggers, Newport, Ruf-&-Tuf, Excalibur.
During 1985, AML diversified into electronics by setting up a plant to
manufacture electronic telephone exchanges (EPABX). It also entered into
marketing pharmaceuticals products and B&W and Colour Television sets under
the name Pyramid.
The Green Field textile project at village Santej with a capacity of processing 34
million metres per annum has commenced commercial production with effect
from 1st April, 1999. It also started operating two captive co-generation power
plants after test runs in the 2nd and 3rd quarter of 1998-1999. The company
commissioned it’s Shirtings facility at Santej during the first quarter of 2000 and
the Knits facility was commissioned in the 3rd quarter of 2000.

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MERGERS AND ACQUISITIONS OF ARVIND MILLS LTD. -
Arvind Mills had gone for acquisition as early as 1990 when it acquired Nagri
Mills. The pattern of Arvind Mill’s M&A profile provides two mergers and three
acquisitions during the period of study. Rohit Mills, a sick textile unit was merged
with the company with effect from 1st November 1996. Arvind Mills has merged
Arvind Intex, a subsidiary company engaged in cotton spinning activities, in
which it was holding a stake of 49.89 per cent.
The types of M&A are both horizontal and vertical. Another strategically
important factor is that Arvind Mills have gone for sick companies for M&As.
The following table shows the various M&A deals done by Arvind Mills Ltd as
an acquirer:

Deal Date Deal Type Target Company

1995 Merger Asoka Mills.
1997 Merger Rohit Mills and
Lifestyle Fabrics.
1997-98 Merger Arvind Intex.
1990 Merger Nagri Mills.

CIRCUMSTANCES UNDER WHICH ARVIND MILLS LTD

UNDERWENT CORPORATE RESTRUCTURING
In the early 1990s, Arvind Mills1 initiated massive expansion of its denim
capacity. By the late 1990s, Arvind Mills was the third largest manufacturer of
denim in the world, with a capacity of 120 million metres.
However, in the late 1990s, due to global as well as domestic overcapacity in
denim and the shift in fashion to gabardine2 and corduroy,3 denim prices
crashed and Arvind Mills was hit hard. The expansion had been financed mostly
by loans from domestic and overseas institutional lenders.
As the denim business continued to decline in the late 1990s and early 2000,
Arvind Mills defaulted on interest payments on every loan, debt burden kept on
increasing.
In 2000, the company had a total debt of Rs 27 billion, of which 9.29 billion was
owed to overseas lenders. In 2000, Arvind Mills, once the darling of the bourses
was in deep trouble. Its share price was hovering between a 52 week high of Rs

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20 and low of Rs 9 (in the mid 1990s, the share price was closer to Rs 150).
Leading financial analysts no longer tracked the Arvind Mills scrip.
The company's credit rating had also come down. CRISIL downgraded it to
"default" in October 2000 from "highest safety" in 1997. In early 2001, Arvind
Mills announced a restructuring proposal to improve its financial health and
reduce its debt burden. The proposal was born out of several meetings and
negotiations between the company and a steering committee of lenders.

MOTIVES BEHIND M&A STRATEGY OF ARVIND MILLS LTD

The motives of M&A strategy for Arvind Mills as have been found out are as
follows:
1. Faster growth to become a global player
2. Product Diversification and entering new but related segments of the
textiles chain
3. Operating Synergies
4. Cost Reduction and Efficiency

BENEFITS OF THE CORPORATE RESTRUCTURING BY

ARVIND MILLS LTD
In February 2001, Arvind Mills announced a debt restructuring plan for it’s long
term debt. While the company set itself a minimum debt buyback target of Rs 5.5
billion, the management was hopeful of a larger amount, possibly Rs 7.5 billion.
In mid-2001, Arvind Mills got the approval of a majority of the lenders for it’s
debt restructuring scheme. Forty-three out of fifty-four lenders approved the plan.
As part of the restructuring, lenders offered over Rs 7.5 billion under the
company's various debt buyback schemes. Some of the banks agreed to the
buyback at a 55% discount on the principal amount, while some agreed to a five
year rollover for which they would be entitled to interest plus the principal. Some
banks also agreed to a ten year rollover for which they would be paid a higher
rate of interest plus principal. The debt revamp was expected to reduce Arvind
Mills' interest burden by 50%.

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FACTORS THAT INFLUENCED THE CORPORATE
RESTRUCTURING OF ARVIND MILLS LTD:

Arvind Mills was promoted in June 1931, by Sanjay Lalbhai's grandfather,

Kasturbhai Lalbhai, and his two brothers, Narottam and Chimanbhai, inAhmeda
bad. When Sanjay Lalbhai took over the reins in 1975, Arvind Mills was at the
crossroads. A high wage structure, low productivity and surplus labour in the
textile mills rendered its businesses unviable in most the products categories in
which it competed. The emergence of power looms in the 1970s aggravated
problems. The government's indirect tax system at that time also reduced the
profitability of its product lines. In the mid-80s, to survive the onslaught of the
small-scale power loom sector, the composite mills, with their higher overheads
had to change their strategies. It became imperative for them to switch to areas in
which the power loom sector could not compete, viz, value added products.
In the mid 1980s, Arvind Mills switched to high_quality fabrics requiring
technical superiority that the power looms could not hope to match. Until 1987,
like any other textile company, Arvind Mills had a presence only in conventional
products like sarees, suitings and low value shirting, and dress materials.
Realizing the bleak growth prospects for textiles in general, Arvind Mills
identified denim as a niche area and set up India's first denim manufacturing unit
in 1986 at Naroda Road, Ahmedabad. To deal with competition from the power
loom sector, which rolled out vast quantities of inexpensive fabrics, and to cope
with the rising cost of raw materials, Arvind Mills diversified into indigo-dyed
blue denim; high quality cotton-rich, two-ply shirting, and Swiss voiles
By the late 1990s, Arvind Mills was in deep financial trouble because of its
increasing debt and interest burden. It’s total long-term debt was estimated at Rs
27 billion, out of which the total overseas debt was Rs 9.29 billion and debt to
Indian institutional lenders was Rs 17.71 billion. However, much of the debt to
Indian financial institutions was secured was not known. Arvind Mills had
defaulted on interest payments on every loan. ICICI was the largest Indian
institutional lender, with a loan of over Rs 5 billion to Arvind Mills. In 2000, the
company reported a net loss of Rs 3.16 billion against a profit of Rs .14 billion in
1999.

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 CONCLUSION

Arvind Limited is one of the leading players in the textile sector in India. Looking
at the number of Arvind mega mart stores, there is a scope for expansion in India
and as well as internationally. In 2012-2013, due to stagnancy in economy, high
inflation and higher interest rates consumer sentiments were affected badly. This
resulted decrease in the business of the company during that year. After the
change in Government in 2014, economy is growing, interest rates are lowered
and inflation has eased. These changes are helping company to get its business
back on track. Company has considerably increased the use of technology in the
manufacturing plants thereby helping company to increase its productivity.
Various training and development programs for employees would definitely
increase the output desired by the company. Exports of the company will increase
in near future as the competition from other countries like China has decreased
due to weak currency and decreasing cost competitiveness of the country.

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