No option but to sell: How Lilliput lost its way

It’s finally over. All that bickering between the promoter of children’s clothing company, Lilliput, Sanjeev Narual, and private equity investors, Bain Capital and TPG, since last year, has climaxed in the company being put up for sale.

“I have no option but to sell,” said Narual, who controls a majority stake in the company. He said the company was no longer in a position to service its debt, according to The Economic Times. The company has debt of Rs 700 crore on its balance sheet.

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According to the newspaper, at least five firms - Mahindra & Mahindra, private equity fund Kohlberg Kravis Roberts & Co, Blackstone, L Capital and India Value Fund - have signed non-disclosure pacts and started negotiations to buy Lilliput.

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“The brand Lilliput, its retail assets and liabilities will be transferred to a new company, which will be sold off to a third party” a person familiar with the development told ET.

The stake sale is expected to fetch around Rs 1,000 to Rs 1,200 crore and will provide an exit option for Bain and TPG, which had held up the company’s Rs 850 crore IPO on suspicions that the company’s accounts had been fudged.

Narual, in turn, accused both private equity investors of trying to seize majority control of. The PE investors had invested $86 million in April 2010 for a 45 percent stake.

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While its stake sale is evident, sources close to the company say that it is still making money at the operating level, according to Business Standard. However, this process will kick-start only after the independent audit is completed. Also, some of the suitors who have been approached have expressed apprehensions of working with the incumbent management.

Lilliput, the Delhi-based kidswear retailer,had deferred its initial public offering (IPO) plans as private equity investors raised doubts over the company’s financial statements. The company had earlier alleged that their PE investors Bain Capital and TPG, which together own 45 percent stake, were creating obstruction in the functioning of the company.

Bain Capital and TPG had been opposing the IPO of Lilliput on account of mismanagement in the company and had withdrawn their nod for IPO.

After both investors decided to investigate the company’s financial statements, Lilliput had to defer its Rs 850 crore IPO plan as they refused to give their consent to the proposed public issue.

This is a clear case of PE investors overestimating India’s growth story. Had the company gone ahead with its IPO, things would have been different. It would have been able to garner enough cash and get rid of its Rs700 crore debt burden. But alas, for now Narula will have to be content with what is left behind post the stake sale.