Yet, Trent’s origins lie in a little-remembered corporate restructuring that unfolded three decades ago. In many ways, Trent began where Lakme ended.
The cash generated from Lakme’s exit from the cosmetics business became the seed capital that funded Tata’s entry into organised retail.
Lakme was the most noticeable and adored cosmetic brand of its times, but its dominance came under threat when the economy was liberalized and import restrictions, relaxed.
Lakme’s exit from the cosmetics business came about in a series of interesting steps that may pique the curiosity of a finance professional and hence it is being recounted despite the passage of three decades.
In 1996, Hindustan Lever Ltd or HLL (now Hindustan Unilever Ltd) entered into an arrangement with Lakme to participate in the latter’s cosmetics business.
It was an umbrella arrangement which took off with the payment by HLL of a non-competition fee of Rs 25 crore to Lakme Ltd.
Simultaneously, a JV company, Lakme Lever Ltd(LLL) was formed to market the cosmetics hitherto done directly by Lakme Ltd. Lakme and HLL had an equal stake in the
Rs 20 crore share capital of this venture.
Lakme’s marketing and sales infrastructure, along with all personnel was, on a slump sale basis, transferred to LLL for a consideration of Rs. 19.51 crore.
Lakme Brands Ltd(LBL) was formed as a wholly owned subsidiary of Lakme Ltd.
LBL issued optionally fully convertible debentures (OFCD) for Rs 75 crore which was subscribed by HLL to the extent of Rs 70 crore and by Lakme Ltd for Rs 5 crore.
Lakme Ltd assigned all its brands and trademarks to LBL for a consideration of Rs 79.61crore.
LLL entered into a brand and trademark licence agreement with LBL, for the use of the trademarks and the brand against the payment of a royalty fee.
Once this architecture was put in place, Lakme Ltd manufactured the cosmetics at its Deonar factory and sold the entire output to LLL at the manufacturing cost. LLL, in turn sold the products in the market.
What changed with the arrangement struck with HLL was that a business previously operated within a single company was split into three distinct functions.
Manufacturing remained with Lakme Ltd, brand ownership shifted to Lakme Brands Ltd, and marketing and distribution moved to the joint venture Lakme Lever Ltd.
The structure facilitated the gradual transfer of the cosmetics business to HLL while allowing Lakme to unlock value from each component
This structure survived for a little over a year. In FY1998, HLL purchased the Deonar unit from Lakme Ltd for Rs 24.03 crore together with the 50 per cent shareholding that Lakme Ltd had in LLL for Rs 90.50crore. An unit in Kandla FTZ belonging to Lakme Exports Ltd (wos of Lakme Ltd) was also sold to HLL for Rs 5.7crore.
Next, the trademarks and brands held by LBL was perpetually assigned to HLL for a consideration of Rs 110.5crore. With that money, LBL redeemed the Rs 70 croreOFCD held by HLL and Rs 5crs OFCD held by Lakme Ltd.
In summary, the cosmetics business of Lakme Ltd was sold in various pieces to HLL as under:
Factory at Deonar & Kandla –Rs 29.73crore; Brands-Rs 110.5crore; marketing and sales infrastructure Rs 100.5crore; non-compete fee Rs 25 crore- in all, approximately, Rs 266 crore.
After paying a whopping sum of Rs 88 crore (including tax) as interim dividend in FY1998 on its equity of Rs13.42 crore, Lakme Ltd retained the balance cash in inter-corporate loans and MF units and other liquid holdings.
A business that would have become increasingly uncompetitive and difficult to sustain in the longer run, was sold in an interesting and in a series of steps to a MNC player that anyway looked to enter this space with other international brands.
As the above was unfolding under the watchful guidance of Simone Tata, the founder of this venture in 1952, Lakme Ltd acquired for Rs 11.9 crore a company by the name, Littlewoods International(India) Ltd from parent of the latter in the U.K. LIIL was operating a retail store in Bangalore and Hyderabad.
Figuratively, as the sun set for Lakme in cosmetics business, the horizon brightened to enter a sunrise industry in branded retail.
LIIL merged into Lakme Exports Ltd. It was renamed Trent Ltd. Next, Trent was merged into Lakme Ltd with the appointed date of 1 July 998. From 1 July1999, Lakme Ltd shed its identity and became Trent Ltd.
When Noel N. Tata took charge as the Managing Director on 15 June 1999, he inherited something less common: a retail venture backed by a debt-free balance sheet and substantial cash reserves generated from the orderly monetisation of Lakme’s cosmetics franchise.
The market today sees Trent as a retail success story. What only very few may remember is that its foundations were laid not in a shopping mall but in an intricate corporate restructuring post the 1991 liberalisation.
Trent began where Lakme ended!