The Global Economic Impact of Private Equity Report 2008 - World ...

2005 – 2007: Moderator, protector andtrusted partnerSince 2005, Subhiksha’s expansion has uncovered manyunexpected new opportunities and threats, but the companycontinues to benefit from the mutual trust that has developedbetween RS and ICICI Venture. According to Deshpande, herongoing relationship with RS is critical: “We talk every week, ifnot every day.” RS echoed the importance of their interactions,describing ICICI Venture’s role during this recent period as “amoderating force, a protector and an advocate for us”.A moderating forceAs Subhiksha began its geographic expansion, RS also beganto think about opportunities to extend the Subhiksha discountmodel into other areas of the retail sector, such as cell phoneequipment and white goods. While each idea represented anexciting opportunity to RS’ entrepreneurial instincts, as aninvestor, Deshpande had a slightly different perspective: “Weneed to have disciplined growth. What would create value?The market does not care whether Subhiksha is also in theXYZ business, but it does care about Subhiksha being the topretailer in the food and grocery sector.” RS and Deshpandewould frequently debate each expansion idea, sometimesheatedly, and expansion into new areas would only proceedif a consensus was reached. For example, while cell phoneequipment was successfully added to Subhiksha’s retail mix,plans to expand into white goods were put off. RS acknowledgedthat ICICI Venture was “a sounding board and a moderatingforce in our growth plan”.A protectorBy 2006, organized retail finally began to take shape in India,given the success of groups such as Pantaloon, Shoppers’Stop, and also Subhiksha. Retail, and in particular the foodand grocery sector, finally caught the attention of India’slargest business groups, and many of them vied to enter thesector and capitalize on the emergence of the Indian middleclass. In 2006, in the midst of Subhiksha’s nationalexpansion, one of the largest listed Indian companiesbecame extremely interested in acquiring Subhiksha as away of entry. But RS refused the offer, unwilling to give upthe company’s independence, especially on the recognitionthat Subhiksha was in a strong and competitive position anda market leader in the industry. Frustrated, the interestedacquirer began using questionable tactics. “They were notonly going after our staff, but also making all sorts ofcompletely false statements in the media that weredetrimental to us such as that we were in financial distress,etc. They were really a bully,” recalled RS.RS knew that the only way to fend off the approach was tobecome a publicly listed company where ownership structurechanges would require general shareholder approval. ButSubhiksha was not yet ready for a listing as the companywas in the midst of its expansion. Almost out of desperation,RS thought of a highly unusual solution: a reverse mergerwhereby Subhiksha would acquire a larger, listed company.This would legally transform Subhiksha into a publiccompany, which would help it remain independent.From ICICI Venture’s perspective, however, this was far froman ideal approach. Deshpande explained: “It would worktechnically, but we opposed it because we felt that thestructure would be too complicated and would obscure themarket’s valuation of Subhiksha … We have always had thevision that RS is standing on a very big opportunity – heshould pursue a proper public listing rather than goingthrough the back door … His equity is very precious and heshould not give it away like that … We finally convinced RSthat doing the reverse merger was not the right approach.”To protect Subhiksha from the damaging publicity createdby the rejected acquirer and help restore RS’ focus on theultimate goal of a successful IPO, ICICI Venture steppedin again. Another round of funding amounting to nearly$7 million was provided to remove any remaining financialconstraints in Subhiksha’s path of organic growth; ICICIVenture also mobilized its own public relations arm to provideguidance and protection to Subhiksha both publicly in themedia and privately through conversations with theaggressive company trying to acquire Subhiksha.ConclusionAs of this writing, ICICI Venture has invested slightly over$20 million in Subhiksha, currently representing 30% of thecompany’s equity. 12 With ICICI Venture’s ongoing assistance,Subhiksha is preparing for a listing on the Mumbai StockExchange. Both sides have a clear understanding thatICICI Venture will exit its investment soon after the companybecomes listed. RS explained: “We want to make surethat our shares end up in the right hands. We are working veryclosely with ICICI Venture to make sure that this will be the case.ICICI Venture’s seven‐year involvement with Subhikshathrough four rounds of financing has been a pivotalcontribution to the company’s rapid growth, increasingthe company’s competitiveness and profitability. Althoughthe investor and entrepreneur had their differences alongthe way, Subhiksha has been transformed from a small,regionally focused retailer into a nationwide market leader inone of India’s most rapidly growing sectors. Throughout thisinvestment period – unusually long by Western private equitystandards – the interests and attention of investor andentrepreneur were continuously aligned and focused on clearlydefined operational and financial objectives. As the companymoves closer to an IPO, and ICICI Venture’s successful exitcomes within view, both sides can reflect on the ingredientsthat led to such a strong, constructive relationship. As RSconcluded, “The kind of network and resources they broughtto us has been very important in our growth.”12ICICI Venture’s investment initially represented 45% of Subhiksha’s equity stake, but it was subsequently diluted to 30% as additional investmentswere made by RS.The Global Economic Impact of Private Equity Report 2008 Case studies: ICICI Ventures and Subhiksha 147