Indian Institute of Management,

Kozhikode

Presented To-
Prof PANKAJ gupta

Submitted By –
Name: Shivam Naidu
Section: B
Roll No: PGPBL/04/048
Subject: Mergers acquisition and corporate restructuting
Topic: DEAL LOGIC AND ANALYSIS
DEAL: ITC Acquisition of Sunrise Foods

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2
 ITC – SUNRISE FOODS
ACQUISITION
INTRODUCTION

In May 2020, ITC Limited, a multinational conglomerate with interests in cigarettes, hotels,
packaged foods, and other consumer goods, announced its acquisition of Sunrise Foods, a
Kolkata-based packaged spice manufacturer. The all-cash, debt-free deal was valued at Rs.
2,150 crore (approximately $280 million), and was completed in two months, on July 27,
2020.

The acquisition gave ITC a strong foothold in the Indian spice market. Sunrise Foods is a
well-known brand in eastern India, with a wide range of spices and masalas. The company
has a strong distribution network and a loyal customer base.

ITC's acquisition of Sunrise Foods is part of its strategy to expand its presence in the fast-
growing Indian consumer goods market. The company is also looking to diversify its product
portfolio and reduce its dependence on cigarettes.

The acquisition is also a sign of the growing consolidation in the Indian spice market. In
recent years, there have been a number of mergers and acquisitions in the sector, as
companies look to gain scale and market share.

The acquisition of Sunrise Foods is a major coup for ITC. It gives the company a strong
position in the Indian spice market, and it is a significant step forward in its diversification
strategy.

About ITC

ITC Limited is an Indian multinational conglomerate company headquartered in Kolkata, West

Bengal. It was founded in 1910 as the Imperial Tobacco Company of India Limited, a
subsidiary of the British American Tobacco Company. ITC has since diversified its operations
into a wide range of businesses, including cigarettes, hotels, packaged foods, paperboards,
specialty papers, agri-business, information technology, and education.

ITC is one of the largest companies in India by market capitalization. It is also one of the most
respected companies in India, with a strong focus on corporate social responsibility. ITC is
committed to sustainable development and has a number of initiatives in place to reduce its
environmental impact.

Here are some of the key businesses of ITC:

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  Cigarettes: ITC is the largest cigarette manufacturer in India. It sells a wide range of
cigarettes under the brands of Wills, Classic, Gold Flake, and Sonar.
 Hotels: ITC operates a chain of luxury hotels in India under the brands of ITC Hotels,
WelcomHotel, and Fortune Hotels.
 Packaged foods: ITC is a leading manufacturer of packaged foods in India. It sells a
wide range of products, including biscuits, snacks, noodles, and ready-to-cook meals.
 Paperboards and specialty papers: ITC is a leading manufacturer of paperboards and
specialty papers in India. It supplies paperboards to a variety of industries, including
packaging, printing, and publishing.
 Agri-business: ITC is a major player in the agri-business sector in India. It operates a
number of businesses, including tea, coffee, spices, and fruits and vegetables.
 Information technology: ITC is a leading provider of information technology services in
India. It offers a wide range of services, including IT consulting, system integration, and
application development.
 Education: ITC operates a chain of schools and colleges in India. It also offers a
number of distance learning programs.

ITC is a well-diversified company with a strong track record of growth. It is committed to

sustainable development and is one of the most respected companies in India.

BACKGROUND
8.53%

32.05%

31.16%

0.18%
28.07%
Cigarettes FMCG - Others Hotels
Agri-Business Paper & Paperboards

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During the time of acquisition, ITC had an annual turnover of over $10.74 Billion and a market
capitalization of $35 Billion.

About Sunrise Foods:

Sunrise Foods is a Kolkata-based packaged spice manufacturer founded by the Sharma

family over 70 years ago. It is a well-known brand in the eastern and northeastern parts of
India, and it specializes in basic ground spices, blended spices, and whole spices. The
company also has an international presence in countries like Japan, France, Germany,
Thailand, Singapore, Malaysia, the USA, the UK, and the Middle East.

Sunrise Foods is currently considering a strategic sale, which could see the Sharma family
dilute their majority stake in the company. The family may also choose to exit the firm
altogether, depending on the terms of the deal.

Shailendra Prakash Sharma, director of Sunrise Foods, said the company has a strong brand
equity in the east and is known for its standardization and quality consciousness. The
Sharmas are seeking a valuation of Rs 2,500 crore for the company, which is two and a half
times their estimated FY19 sales of Rs 1,000 crore. Sunrise Foods has appointed JM
Financial as its investment banker for the deal.

The company has plants located across India in Kolkata, Agra, Jaipur, Bikaner, Sumerpur,
and Erode. As of the announcement of the acquisition deal by ITC, it had a turnover of Rs.
591 crore in FY2020 and had a net worth of Rs. 242.89 crore.

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CONTEXT OF THE MERGER (FMCG SECTOR)
Industry
Classification
FMCG

Foods & Beverages Healthcare Household & Personal Care

50 persecto
cent of the
19 % of the FMCG r.
sector It accounts for 31 This segment
health beverages, per cent of the includes oral care,
staples/cereals, sector. hair care, skin care,
bakery products, This segment cosmetics/deodorant
snacks, chocolates, includes OTC s, perfumes,
ice cream, products and feminine hygiene and
tea/coffee/soft ethical paper products,
household cleaners
Fabric wash,
• FMCG market in India is expected to grow at a CAGR of 27.86 per cent
this is majorly happened due to rise in rural consumption to drive the
FMCG market also many players are expanding into new geographies
and categories.
• Patanjali will spend US$ 743.72 million in various food markets.
• Dabur is planning to invest Rs 250-300 crore (US$ 38.79-46.55 million)
in FY20 for capacity expansion and is also planning to make acquisitions
in the domestic market.
Key Trends within the Industry: -
Increased Demand: Rural India is witnessing increased demand for
quality goods driven by upgradation of FMCG distribution channels.
Rising digital connectivity is also driving demand
Attractive Opportunities: Disposable income of both the middle
class and lower middle class has increased. Exports is also another
growing segment
Policy support: Investment approval of up to 100% foreign equity in
single brand retail. SETU scheme and PLI scheme for the food
industry
Higher Investment: Foreign companies are investing in rural India
to penetrate deeper.

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TIMELINES OF DEAL
Date Action taken
May ITC decided to own 100% of the equity share capital of the
23, seventy-year-old company Sunrise Foods Private Limited (SFPL)
2020 by going into a Share Purchase agreement (SPA) on 23rd May
2020 amid the COVID lockdown. SFPL is a company that is
essentially occupied in the business of making spices sold under
the brand name “Sunrise”
July All the formalities of the acquisition of SFPL by ITC were
23, finished on 27th July as per a stock exchange filing by ITC. It was
2020 a Rs. 2150 crore deal on a 'cash-free, debt-free' basis
Febru ITC began the process of merging SFPL with ITC a few months
ary after acquiring SFPL. Earlier it was run as a wholly owned
26, subsidiary of ITC. In a press release, ITC said that the
2020 amalgamation has been given a go ahead by the Kolkata bench of
National Company Law Tribunal
April As per the regulations, ITC submitted the required documents to
1, SEBI and the amalgamated entity became effective from April
2020 1st, 2021

NATURE OF THE DEAL

The ITC – Sunrise Foods deal was a horizontal acquisition initiated
by ITC. ITC within its FMCG business operates a brand named Aashirvaad
which has spices in its product portfolio. Aashirvaad’s select range of spices
has a strong presence in the southern states of Andhra Pradesh and
Telangana. Given that Sunrise foods also operates in the same product
category, it is a horizontal acquisition. Further, it was an all cash, debt free
deal valued at Rs. 2150 Crore. In addition, the sellers i.e., Sunrise foods
were entitled to a contingent consideration of amount not exceeding Rs. 150
Crores, which was payable upon Sunrise achieving mutually agreed
operational and financial milestones over a period of 2 years.
The acquisition of Sunrise Foods was another step by ITC to continue
its focus on non-cigarette businesses. It was aimed to help ITC ramp up its
existing spices portfolio under the Aashirvaad Brand. It would also help
ITC to enhance its footprints in the spices segment in North-Eastern and
Eastern India. The deep consumer connect of Sunrise foods in its focus
markets, together with the synergies arising out of the supply chain and
sourcing capabilities will help ITC scale up its business within the spices
category.

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CORPORATE STRATEGY ANALYSIS
ITC: Corporate Strategy
ITC’s corporate strategy revolves around creating multiple drivers of
growth by developing a portfolio of world-class businesses that best
matches their organizational capabilities with opportunities in domestic and
export markets. The firm has a conglomerate strategy, with a presence in
multiple markets with market-leading positions. This helps ITC diversify its
incomes, reducing dependency on a particular market or product.
ITC also aims to excel in each market that they have entered, to make
and maintain a world class quality to maintain internationally and
domestically competitive, with leadership positions. With established
positions in FMCG, Hotels, Paper, Paperboards & Packaging, Agri Business
and Information Technology, ITC aims to strengthen and further diversify
these positions. In the spices segment, ITC is a market leader in Telangana
and Andhra Pradesh.
Sunrise: Corporate Strategy
Sunrise is a well-established spice brand – with manufacturing across
north india and pan-India presence. Internally, Sunrise foods pursues
quality in its entire value chain from RM procurement to spice production.
Externally, Sunrise foods have pursued both domestic and international
markets through high quality spices and regional blends to improve
penetration.
Strategic alignment of Acquisition
ITC has had limited pan-india and international entry compared to
domestic market leaders in spices such as MDH, Sunrise and Everest.
Hence, in a bid to rapidly scale up its spices business, the acquisition of
Sunrise is aligned with this strategy.

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SWOT ANALYSIS:
Scale up its FMCG business in profitable manner by
leveraging
— Its strength through focused consumer insights and
package knowhow
— A deep and wide distribution network and strong rural
linkage
Strength
— Agri- commodity sourcing expertise and cuisine
knowledge
Ramp up its spice business in country
— ITC already sells spices under Aashirwad brand, popular
in Telangana and Andhra Pradesh markets
Sunrise loses its founding pillars
— Only one of the seven brothers and cousins who
nurtured the 70 years old family business will continue
to be on board
Salvage each other’s territory
Weaknes — Even though both Aashirwad and sunrise brands
focused on separate geographical markets, each might
s have salvaged some overlapping markets for competing
products
Sub-Scale acquisition
— The acquisition of sunrise will add only 5% to ITC’s
revenue.
— This deal is indicative of preparedness of ITC’s goal to
reach 1 Lakh Cr turnover for non-cigarette, FMCG business
by 2030
— The acquisition gives an opportunity to sunrise to process
Opportu and professionalism to be gained from ITC
nity — Branded spices in an exciting and high growth segment as
customer shift from unbranded to branded due to high
focus on safety, trust and quality during and after COVID
19
— Depleting cash reserve at the time of pandemic is a risky
affair since the logistics and labor costs are set to rise
Threat — The operating profit of the company is still largely by
cigarettes (85%)

ITC is Rs 44,415 Cr Company (60% of the net revenues from non-cigg.). The company’s agility and
resilience in dealing with the new normal.

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DID THE MERGER ACHIEVING ITS INTENDED
OBJECTIVES?
ITC’s Objective:
“To accelerate growth in FMCG Business and Strategically aid it multi-
dimensional investments”

Merger statistics:
Sunrise Foods – East Spice Market Leader:
▪ Sunrise Foods is a market leader in the fast-growing spice area in
eastern India. It has created a strong consumer franchise over the last
70 years
▪ Provides differentiated product portfolio tailored to regional
tastes and preferences, both in the basic and blended spice
segments.

▪ This will be backed by multi-dimensional investments along

with strategic acquisition prospects
Aligned with ITC’s Vision
▪ ITC has been attempting to shift its business mix away from
its base tobacco and toward FMCG across categories.

▪ Enhancing the competitiveness of Agri value chains in India whilst

making a meaningful contribution to enhancing farmer incomes

▪ This acquisition would add to the company's product portfolio and

had been in line with ITC's desire to aggressively build up its
spices business and expand its reach across the country.
Leverage Synergies
▪ Enables rapid scaling of its FMCG businesses in a profitable way by
leveraging its organizational strengths, which include deep
consumer insight, a deep and wide distribution network, agri-
commodity sourcing expertise, cuisine knowledge, strong rural
interconnections.

▪ The company also expects strong value creation prospects in Sunrise

Foods' extensive consumer connections and distribution
capabilities. Furthermore, ITC can benefit from the sourcing and
supply chain expertise of its agribusiness, as well as its pan-India
distribution network.
Revenue Growth
• It is expected that the acquisition will add ~7% potential revenues
to the FMCG business
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 • The deep consumer connect & distribution strength of Sunrise will
provide significant value creation opportunities
• Branded spices is a high growth segment as consumers shift from
unbranded to branded due to higher focus on safety, trust and
quality
• Revenues from the FMCG business grew 16 percent for ITC in
2020-21 compared with a peer group average of 8 -9 percent
This acquisition would add to the company's product portfolio and had
been in line with ITC's desire to aggressively build up its spices
business and expand its reach across the country.
The proposed merger was consistent with ITC's strategic approach of
rapidly scaling up its FMCG businesses in a profitable way by
leveraging its organizational strengths, which include deep consumer
insight, a deep and wide distribution network, agri-commodity sourcing
expertise, cuisine knowledge, strong rural interconnections, and packaging
know-how.
The company also expects strong value creation prospects in
Sunrise Foods' extensive consumer connections and distribution
capabilities in the key areas. Furthermore, ITC can benefit from the
sourcing and supply chain expertise of its agribusiness, as well as its
pan-India distribution network.

VALUE ADDITION OF MERGER:

The merger achieved goal of diversification with agri buisness &
FMCG segments book growth due to acquisition and proportion of Cigarette
segment in revenue portfolio has decreased. Agri business is inching its way
to take the crown for the largest segment from FMCG- Cigarettes. Other
segments are facing declines, but this is due to the covid pandemic.

Reported Growth in FY % Of Revenues in Avg Proportion

Segments 20-21 FY 20-21 pre-deal
FMCG - -5% 38% 43%
Cigarettes
FMCG – 15% 25% 24%
Others
Hotels -66% 1% 3%
Agri Business 23% 22% 18%

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 Paper & -8% 10% 11%
Packaging

The market expansion target was also achieved with the acquisition,
as the company expanded the market coverage by 30% and outlet
coverage by 10% post the purchase. From a shareholder's perspective, P/E
ratio for ITC had been falling for several years, primarily due to the
dominance of the controversial cigarette segment and the disproportionate
impact of GST changes to that business segment. Post acquisition, the
market gave thumbs up signals as PE ratio fall got reversed and it picked
up.

It was expected that the acquisition will add ~7% potential

revenues to the FMCG business. The deep consumer connect &
distribution strength of Sunrise will provide significant value creation
opportunities. Also, Branded spices is a high growth segment as consumers
shift from unbranded to branded due to higher focus on safety, trust and
quality. Revenues from the FMCG business grew 16 percent for ITC in
2020-21 compared with a peer group average of 8 -9 percent – which shows
the stellar success of the acquisition above the expected and peer
performance.

ROADBLOCKS AND LEGAL ISSUES

• Sunrise was a small brand with major presence in the eastern part of
India. Further, it was an unlisted, privately held company owned by a
family. Therefore, the deal overall went through without any major

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 roadblocks, legal or otherwise, getting approvals easily from CCI,
SEBI and NCLT.
• When the announcement was made by ITC on 23rd May, nation was
under lockdown to contain the spread of COVID-19. Moreover, COVID
pandemic has tremendously affected the FMCG industry. ITC’s net
profit declined by 26% in the quarter it announced the merger.
• ITC stated – “Unprecedented disruptions in economic activity caused
by nationwide lockdowns in the wake of COVID-19 pandemic weighed
on the company’s performance during the quarter”

STAKEHOLDERS RESPONSE
Investors
• Investors believed this move will help ITC to complete its objectives.
Share prices went up (intraday & long term)

Shareholders
• Common shareholders had concerns regarding expensive
acquisitions, unrealistic expectations, etc.
• Experts were evaluating the deal to cost somewhere around Rs 1,500
Crores while the actual numbers were around 40% higher
Credit Rating Agencies
• CRISIL changed its rating on the long-term bank facilities of SFPL
from 'Rating Watch with Positive Implications' and upgraded the
rating to 'CRISIL AA/Stable' from 'CRISIL A’

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 • The rating upgrade stems from the fact that SFPL was now a wholly
owned subsidiary of ITC Limited. The benefits it will reap in from this
acquisition was factored into the rating upgrade
• 30 Cr. debt was paid back and no due certificate from the bankers
was received and then on company’s request the rating was
withdrawn

DEAL VALUATION:
Deal Valuation: Sunrise Foods Pvt. Ltd. was a private limited company
hence we were unable to find out its financials. That’s why we were unable
to perform DCF Valuation. Hence, we went for the relative valuation.
We identified relative transactions in last 10 years span. We identified
multiple which were related to FMCG sector due to the paucity of relevant
publicly traded firms operating in spice business.
EV/EBITDA transaction multiple of 26.11x- is expensive compared with
25x average transaction multiple of past 10 years of FMCG sector in India.
Moreover EV/ EBITDA is inexpensive than trading multiple of 32.3x
PAT transaction multiple of 37.17x – is inexpensive than average
transaction multiple of past 10 years of FMCG sector in India i.e., 46.1x.
Moreover, PAT multiple is inexpensive than trading multiple of 44.8x

Valuation Dynamics
Company Valuation -Enterprise Value (INR Cr) 2300
Revenue Multiple (Based on EV) 3.88
EBITDA Multiple (Based on EV) 26.11
PAT Multiple (Based on EV) 37.17
Revenue (INR Cr) 592.71
EBITDA (INR Cr) 88.09
PAT (INR Cr) 61.87

DEAL STRUCTURE:

Deal Information
Deal Date May, 2020
Cash Consideration Rs. 2300 Cr
Sunrise Food Turnover Rs. 591.5 Cr
Type of Merger Forward Merger
Ownership of Acquirer in Merged Company 100%

Stock Price:
Stock Price

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Acquirer (ITC) Traded in NSE &
BSE
Target (Sunrise Foods) Not Listed
Price of ITC before the announcement Rs. 186.35
Price of ITC after the announcement Rs. 191.5
Market Capitalization of ITC Rs. 2.86L Cr

Shareholding Pattern:
Shareholders No. of Shares % Share holding
Promoters 0 0
Foreign Institutions 1230197373 9.98%
NBanks Mutual Funds 1317323452 10.69%
Others 3927273356 31.87%
General Public 1761425886 14.29%
Financial Institutions 4071916089 33.04%
GDR 14502025 0.12%

Sellers are entitled for a contingent consideration of an amount not exceeding Rs. 150 crores that is
payable upon Sunrise achieving mutually agreed operational and financial milestones, over a period of
two years

DEAL JUSTIFICATION:
ITC’s benefit from the deal:
• Expands product portfolio in high growth market: ITC's
Aashirvaad range of spices has a strong presence in Telangana and
Andhra Pradesh and the company is one of India's leading producers
and exporters of high-quality food-safe spices. The acquisition will
augment the company's product portfolio and is aligned to ITC's
aspiration to significantly scale up its Spices business and expand its
footprint across the country.
Sunrise benefit from the deal:
• ITC’s agri sourcing capabilities: Its empowered plan with farmer in
form of e-choupal through its agri sourcing division will help ITC in its
aggressive sales growth objective in its spices segment which will
further assist sunrise to expand its reach and to increase its revenue
in the medium to long run.
• Huge distribution network that will enhance value derived from
sunrise foods : Sunrise consumer connect in the focus markets,
together with synergies arising out of the sourcing and supply chain
capabilities of the company's agribusiness and its pan-India
distribution network, will provide "significant value creation
opportunities" for the company.

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POST-MERGER SCENARIO
Final Deal

▪ On July 27, 2020, ITC completed the acquisition of SFPL in an all-cash deal valued at
Rs.21.5 billion / Rs.2,150 crore

Additional Terms of deal

▪ The company made an upfront consideration to the owners of SFPL on a cash-free,

debt- free basis.

▪ In addition, the sellers are entitled to contingent consideration of an amount not

exceeding Rs 150 crore, which is payable upon Sunrise achieving mutually agreed
operational and financial milestones, over a period of two years

Final Stock price

▪ After the announcement of deal, The stock rose 4.02 per cent to Rs 193.85 on BSE. CLSA
has a price target of Rs 190 on the stock, as it feels Sunrise will strengthen ITC's spices
division in East India. In contrast The shares of the company closed 2.76 per cent higher at
Rs 191.50 on BSE.
▪ Market Capitalization of ITC - Rs. 2.86L Cr

Revenue projections

▪ In the medium term, the foods business is expected to be the heavy lifter for the
segment, with contribution increasing from 16% of total revenue in FY16 to 22% in FY20
while the acquisition of Sunrise Foods will further add 6-7% to the revenues.

Further consolidation of downstream business

▪ The acquisition of SFPL marked the biggest buyout by ITC, which was looking at building a
portfolio of non-tobacco products. Post-acquisition, SFPL and its two subsidiaries Sunrise
Sheetgrah Private Limited, and Hobbits International Foods Private Limited became
wholly- owned subsidiaries of ITC

ROAD AHEAD FOR ITC

Inorganic growth

▪ The SFPL Foods acquisition deal demonstrated ITC’s preparedness for inorganic growth

▪ Following the completion of the SFPL acquisition, ITC switched to an aggressive mode
to scale up its business in the non-tobacco FMCG segment

ITC revenue targets

▪ ITC could look at more such acquisitions after Covid-19 as many regional brands could be
available at a good valuation. Given its non-cigarettes FMCG focus, ITC targeted to
achieve
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 Rs.1,000 billion in revenue from its FMCG business by 2030, expecting acquisitions to help in
doing so.

▪ To achieve the revenue target, the company enhanced its marketing and
distribution infrastructure, setting up warehouses and factories.

Potential direction of ITC investments

▪ ITC expected that its investment in building world-class consumer goods factories and
distinctive hospitality assets would contribute to the Country’s competitive capacity.

LEARNINGS
Entities Involved in the deal

While upfront one might think that in mergers or acquisitions, only the stakeholders are
involved and that too only majority stakeholders. But that is not entirely the case as
there are always other entities involved such as regulatory bodies like NCLT, SEBI and
CCI, financing institutions, etc. We got to learn on how and when these entities come
into picture in case of mergers and acquisitions.

Factors affecting mergers

There are various factors involved in mergers and acquisitions. While some of them may
be internal factors such as companies policies on mergers, its cash flow, future
prospective, etc. other would be external factors such as how competition commission
looks into the deal, how the market operates, etc.

Inorganic aggressive growth

In order to gain competitive advantage quickly companies follow inorganic growth i.e.,
acquiring/ merging with key players in certain markets partly or completely to align with
their strategic goals along with leveraging the combined synergies to gain market
leadership in certain segments.

X X X

References:

• https://www.linkedin.com/pulse/analysis-itcs-acquisition-sunrise-apoorva-sahay/

• https://www.business-standard.com/article/companies/sunrise-foods-eyes-strategic-sale-
valuation-pegged-at-rs-2-500-crore-119101700905_1.html

• https://www.itcportal.com/about-itc/shareholder-value/key-financials/q3fy21results-faq.pdf

• https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Sunrise_Foods_Private_Li
mited_August_04_2020_RR.html

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• https://images.assettype.com/bloombergquint/2020-09/b17a7dcb-4d29-44fb-bbfa-
5cbb9c9e283f/IDBI_Capital_FMCG_Sector_Update.pdf

• https://www.icicidirect.com/mailimages/IDirect_ITC_Q4FY20.pdf

• www.icmrindia.org

• https://www.ventureintelligence.com/ma/index.php

• https://www.equitymaster.com/stock-research/financial-data/ITC/ITC-Detailed-Share-Analysis

• https://images.assettype.com/bloombergquint/2021-07/2582e0f9-9758-479d-8b7e-
401facf82a8b/Dolat_Capital_ITC_Annual_Report_Analysis.pdf

• https://www.itcportal.com/media-centre/press-releases-content.aspx?
id=2267&type=C&news=ITC-Sunrise-Pvt-Ltd

• https://www.business-standard.com/article/companies/itc-acquires-spices-maker-sunrise-
foods-in-all-cash-deal-for-rs-2-150-cr-120072800041_1.html

• https://economictimes.indiatimes.com/industry/cons-products/fmcg/nclt-approves-
amalgamation-of-sunrise-foods-with-itc-says-company/articleshow/81834599.cms

• https://www.itcportal.com/about-itc/shareholder-value/pdf/lodr01042021.pdf

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