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The Nutgraf: A lot can happen over coffee


Welcome back to The Nutgraf – your weekly newsletter to help make sense of the world around you. It separates the signal from the noise. The wheat from the chaff. The spam from the things that matter. All without covertly signing you up for a UPI account (for now). 


Let’s dive in.


Cafe Coffee Day’s 100-crore problem

In a tragic turn of events, VG Siddhartha, the founder of Cafe Coffee Day (CCD), India’s largest coffee chain, was found dead on Wednesday. A day and a half after he went missing, in an apparent suicide.


In a letter purportedly sent to the board, Siddhartha wrote that he had failed to create the “right profitable business model despite his best efforts.” He also wrote that he was “facing harassment” from the tax authorities, took responsibility, and said he was sorry to have let down all the people who had put their trust in him. 


It’s all really sad. 


How did it come to this? Was the financial situation that dire? Perhaps you are looking for a ready explainer. 


This isn’t that explainer. Mostly because nobody knows the answer yet. It will take weeks before things become clear. 


CCD is a complicated company, with multiple holding companies, subsidiaries, and promoters – all owning shares and assets, entangled with complex debt structures, leverages and collateral. CCD finds itself in a hole. We know it’s a big hole. Nobody knows with certainty how big the hole is. Nobody knows whether it will ever get out. 


But we know it tried. Which led to some collateral outcomes.

The debt situation


Debt has been a constant, worrying, recurring theme with CCD. 


Back in 2015, CCD was around Rs 1,000 crore (~$150 Mn) in debt. It launched an IPO that year partly to service that debt.


In the year ending 2017, that rose to Rs 4,400 crore (~$660 Mn). 


In 2018, that number was Rs 5,000 crore (~$750 Mn). 


In 2019, Rs 6,500 crore (~$970 Mn).

Unfortunately, CCD’s revenues didn’t go up as quickly as its debt did. But it had one thing that could bail it out. CCD and Siddhartha owned nearly 20% of a company called Mindtree. 

Mindtree’s situation


Mindtree is one of India’s oldest IT firms, set up at the height of the outsourcing revolution. At the end of 2018, it found itself in a unique situation: 


  1. It made a billion dollars of revenue the previous year.
  2. Its biggest shareholder, Siddhartha and CCD wanted to sell their 20% stake.
  3. The promoters of the company owned just 14% of the company.


Mindtree and Siddhartha were a good combination. He was an early investor, and despite owning 20% of the company, Siddhartha mostly left Mindtree alone. And by all accounts, he even supported the company through its tough times. 


But he wanted to cash out. As The Economic Times reported in March


Siddhartha had prepared the Mindtree founders for the news in September, letting them know his reasons over dinner at his residence. The Mindtree founders heard him out but opposed any deal with a peer such as L&T Infotech. Instead, they suggested selling blocks in the secondary market or to a clutch of PE investors with no board seat or rights.


“Everyone knows that would have destroyed value,” said an investment banker privy to the discussions. “How can you sell such a large block  without dragging the share price down?”


That was the problem. Talks with multiple buyers broke down because they needed more control and power at Mindtree. People who own 20% of a company usually do. 


This is where L&T comes in. 


L&T, one of India’s largest conglomerates, had its eye on Mindtree for a while for a potential acquisition. It saw its chance, made an offer to Siddhartha he couldn’t refuse, and moved swiftly to own 20% of the company.

Dominoes start to fall


Once L&T got interested, a lot of things happened very quickly:


  1. First, the IT department stepped in and attached Siddhartha’s Mindtree shares. Shares are attached when the I-T department believes that money is owed and key assets are being sold off, which may lead to defaults. This put the sale on hold. Plus, there was nearly Rs. 1,000 crore ($150 Mn) of personal debt by Siddhartha himself. 
  2. Meanwhile, Mindtree furiously worked behind the scenes to stall the sale. Anyone but L&T. It considered buybacks, other buyers… everything. To no avail. 
  3. Then the IT department released Siddhartha’s Mindtree shares, but attached CCD shares instead. 
  4. Once the shares were released, L&T promptly bought the Mindtree stake and added 5% from the public market. This put its share above 25%, and made it eligible to place an open offer to all of Mindtree’s shareholders. 
  5. Siddhartha and CCD made nearly Rs 2,100 crore (~$ 315 Mn) from the sale, and it was expected that this would cut the company’s debt by half. Analysts and shareholders were buoyed and optimistic. Finally. 
  6. Mindtree gave its shareholders a huge dividend, commonly referred to as a ‘poison pill’, which makes the company less valuable during a hostile takeover attempt. 
  7. L&T’s open offer took hold, and it started capturing more and more Mindtree, inching closer to the 50% mark. There was one holdout – Nalanda Capital, which owned 10% of Mindtree and refused to sell.
  8. SEBI sent a show-cause notice to Nalanda Capital, asking if it was acting with the founders of Mindtree and spurning an open offer.
  9. Nalanda Capital sold its share, giving L&T control of Mindtree. The takeover was complete.
  10. In the earnings call after the sale, CCD told investors and analysts that net debt had fallen from Rs 3750 crore (~$560 Mn) to…Rs 2400 crore (~$360 Mn). 


Wait. What?


CCD made Rs 2,100 crore from the sale, but its debt reduced by a mere Rs 1,350 crore. What happened to the rest? 


Nobody has a clear answer. As Mint reported


The company’s explanation was that promoter debt worth ₹600 crore was transferred to the company in connection with the Mindtree deal at the end of March, which was later settled in May. Due to this, the debt numbers aren’t exactly comparable, it pointed out in the call. “Coffee Day’s explanations were hardly convincing, and we sold our holdings soon after the call,” said a private investor who attended the call, on condition of anonymity.


Latest filings reveal that CCD’s gross debt has risen to Rs 6,500 crore ($977 Mn).


In May, CCD was in talks to sell to Coca-Cola at a valuation of Rs 10,000 crore ($1.5 Bn).


In June, L&T took over Mindtree. A deal that cost them a little over… Rs 10,000 crore ($1.5 Bn).

When is a user a real user?

No, that’s not a trick question. I’ll explain.


Let’s take Google first. 


Last week, Indian rapper Badshah posted his video “Paagal” to YouTube. In less than 24 hours, it was seen 75 million times, breaking the record for the most views in a day. 


Then YouTube said, um… no. It doesn’t count.


First, there was speculation that this was because the video’s views were driven by server farms and bots, which YouTube attributes as “fake views”. But it turns out that the real reason was because the views were driven by paid marketing – Badshah had purchased advertisements from Google and YouTube, and according to YouTube, that doesn’t count. 


Okay. Paid users don’t count. Got it. 


Then there’s Facebook. 


In the US, under increased scrutiny from antitrust regulators about whether they are a monopoly, Facebook has pointed to TikTok. A lot. During a hearing on the market power of platforms, Facebook’s head of global policy Matt Perault said: 


“We compete with companies from all around the world. TikTok, for example, a Chinese app launched less than three years ago, has been downloaded more than a billion times and was the most downloaded iOS app in 2018.”


What’s not mentioned? TikTok is one of Facebook’s biggest advertisers, and spends millions, maybe even hundreds of millions, on its platform to acquire users. 


Paid users that count. And prove ‘we aren’t a monopoly’, according to Facebook. 


My favourite part is this bit from Axios:


Asked last week about Facebook’s argument around TikTok, presidential candidate Sen. Elizabeth Warren (D-Mass.) burst into laughter for two seconds, paused as we got onto an elevator, then laughed again.


I don’t think Badshah finds it funny.

Amazon wants to friend Reliance. Maybe.

Apparently, Amazon is in talks to take a 26% stake in Reliance Retail, India’s largest offline retailer.


Once we ignore the poetry of Amazon (run by the richest man in the world, Jeff Bezos) investing in Reliance (run by the richest man in India, Mukesh Ambani), we are left with one question: Why? Amazon isn’t really known to be a company to invest in a competitor. They just wipe them out. Perhaps this is a move to protect itself. Or hedge outcomes. Or maybe Reliance has something that Amazon needs.


The story says a lot, and says little at the same time, but the following points emerge: 


  1. Amazon approached Reliance first. 
  2. Alibaba was in talks with Reliance, but talks fell through because of valuation reasons. 
However, the story quotes two executives, who say the following:   


Executive 1 


“Reliance too is keen in case valuations match. Both sides have realised it is better to collaborate rather than fight,”


Executive 2


“There are no talks. What does Amazon bring to the table that Reliance Retail doesn’t have or doesn’t know?”


That part is true. Reliance has and knows everything.

What We’re…Watching

A documentary series called Cooked


Perhaps you watch cooking shows. You know the formula. Contestants battle it out in a reality show. Or a host travels to a faraway, exotic land to profile a chef with a sob-story and a rags-to-riches tale. Swivelling cameras. Orchestral music. Tight, close, colour-corrected editing. 


Cooked is none of those. Just look at what the description of the show says.


“Explored through the lenses of the four natural elements – fire, water, air and earth – Cooked is an enlightening and compelling look at the evolution of what food means to us through the history of food preparation and its universal ability to connect us. 


Highlighting our primal human need to cook, the series urges a return to the kitchen to reclaim our lost traditions and to forge a deeper, more meaningful connection to the ingredients and cooking techniques that we use to nourish ourselves.”


Cooked is different because it’s about cooking. You can find it on Netflix in India. I recommend.