Amitha demystifies Melstacorp

By Antoinette Ludowyk

Q: The firms that come under Melstacorp have been independently run so far. Why is it that they are now being brought under a holding company structure?

A: As you correctly put it, these companies existed in the past as well, and were part of the DCSL group, and the parent company was DCSL, which is until recently. From their reserves they had invested in these other companies, but the major issue faced by DCSL was that in terms of promoting these companies, there was a limited amount that they could do under the DCSL umbrella, because DCSL is caught under the NATA Act.

Because their core activity is the brewery of alcohol and alcoholic beverages, they were restrained in having any form of publicity or advertising. If they gave their brand name, then the other companies couldn’t advertise at all. So, to create a brand name, it was not very cost effective; each company had to go on their own, so it was felt that if you separate these companies out, you would have twin objectives, and one is publicity wise.

You can give more publicity under the Melstacorp umbrella, rather than DCSL. Then you can have greater attention and focus in developing these individual businesses, if it was separated out, so that’s why over a period of time now, they have transferred the investments to a separate holding company called Melstacorp.

The other important reason is, being a company which is engaged in alcoholic brewery, this company DCSL, is taxed at 40%, where as normal companies are taxed at 28%. There’s a big difference, so, it makes sense to have the other company’s under a different umbrella, and having a shared services platform. Then it becomes much more cost effective and tax efficient.

Q: Does this mean to say that DCSL will not have any other companies coming under it?

A: Well, eventually it will be left with its core activity which is the bottling of alcohol and alcoholic brewery. The bottling plant will be there but they will take out the other investments to a different company through Melstacorp. Still there are residues of investments left with DCSL but bulk of them has been transferred to Melstacorp.

Q: How many subsidiaries/sectors are under Melstacorp at present?

A: At the moment there are 15 group companies and two other associates within the Melstacorp group. Just to give you a few examples, we have subsidiaries which are Lanka Bell, Bell Solutions in the telecom frontier, then we have plantation companies i.e. Balangoda plantation, which is a subsidiary. We have Continental Insurance, and Texpro, which is a textile manufacturing company, Melsta Logistics engaging in logistics, and we also have Browns Beach Hotel, Pelwatte Sugar, Splendor Media, and the latest that we have created is Melsta Regal Finance, which will be going for their public launch on 18 October.

Q: How about Aitken Spence?

A: Yes Aitken Spence is an associate company; we have about approximately 43% of Aitken Spence. We had a mandatory offer; the idea was to make it a subsidiary, but we were not successful in gathering the shares at that particular time. But after the mandatory offer was concluded, we can buy 2% each year within the SEC regulations, so, in that process within three to four years, it can become a subsidiary. If you want to hasten that process you can make another mandatory offer once again, or otherwise you can just pick it up, without offering to all the shareholders, 2% each year.

Q: What are the new ventures that you have embarked on this year?

A: Melsta Regal is the only one that we have been working on, but having said that, we have looked at two or three different themes of activity, but it has not been crystallised into a business proposition as yet. We are always on the lookout either to make an acquisition which would make sense financially, or some interesting line of business. We are always examining the possibilities and opportunities that are there, but at the moment it has not crystallised into any definite business.

Q: With many finance companies in existence already, what was the thinking behind the formation of Melsta Regal?

A: Yes, there are all together 52 finance companies so, why have another one? The market appears to be saturated. The reason is twofold, one is, there are very few finance companies offering the full gamut of banking services. One of the fundamental differences between a finance company and a bank is that you can’t issue a cheque in account, basically you can’t issue a current account, so barring that, technically, if you obtain different licenses to do leasing, then you can offer almost the same kind of services, including trade finance activities which we hope to do.

We feel there is a growing market in the SME sector, the backbone of the economy would be in that sector and these small businesses invariably won’t have proper security, they are averse going to banks to borrow money for various reasons. So there is a gap that we can fill in there. Also DCSL sometimes has surplus cash from time to time, which can be invested. Those synergies were there. We identified them and we felt that there would be a need for a finance company targeting this middle income group and the SME sector.

There is also a niche market, in people who are coming out on retirement, they are having their savings and they want something with a stable background and with good capital structure and good track record. There we can offer them higher rates than the bank so that’s where we felt the need for such an institution.

Q: What functions, if any, will be centralised under Melstacorp in the companies they control?

A: Yes. We feel this is the way to go, so we are in the process of setting it up. For instance, in the HR field there is no need to propagate certain structures within the companies. Of course, if it is an extremely large one, then they must have their independent HR managers, otherwise, the training functions, talent searches and everything can be handled by the group HR structures. Treasury management is another area, now treasury management has become a very specialised field of activity. Many years ago, we had chief accountants, but now this function has evolved, and we have a separate treasury manager. So, now we provide treasury services at the group level supporting the companies.

Some of those two activities will be centralised, then purchasing for instance; you can get huge quantity discounts. Therefore, inventories and purchasing will be centralised, to get the benefit of wide discounts and so on.

Q: Recently Melstacorp has been exposed to some controversy regarding the purchase of shares of Lanka Milk Food and the SEC maintaining the firm has to make a mandatory offer to the rest of the shareholders. Would you be able explain the company’s position on this?

A: Well, very briefly, because the matter is in courts, I don’t want to go into it too much. But yes, as you correctly pointed out the SEC alleged that Melstacorp had triggered the Takeovers and Mergers Code and were required to make a mandatory offer. Since we did not proceed with it they have filed action against the Melstacorp Board.

Our view is that we had not triggered off the Takeovers and Mergers Code, because from the time it was privatised, the group held the majority of the shares and controlled the Board of Lanka Milk Foods. All the directors were from the group directors, and in accordance with the SEC regulations, they appointed two independent directors. Barring that, up to date, the Board is controlled by the group directors. We feel that in view of the fact that from the inception the group had the controlling stake in LMF, we have not violated the Takeovers and Mergers Code, and we in turn have filed action in the Appeal Court saying that the view held by the SEC is incorrect and that has to be looked into. So, most likely we will get a decision shortly.

Q: Melstacorp is also buying into JKH. What’s the holding percentage now?

A: Yes. Melstacorp was buying in and earlier shares were bought by DCSL and transferred to Melstacorp, so we have, I couldn’t tell you the exact percentage, but I would guess somewhere under 3-5%.

Q: Will more Harry Jayawardena-controlled firms be brought under Melstacorp?

A: There are a few. DCSL has a few shares to be transferred but they are not of significance. I would say 95% have been transferred. There are a few shares left in Commercial Bank, DFCC and HNB, which need to be transferred, but they are not of very large quantities, so barring that, all have been transferred.

Q: During your tenure at Commercial Bank, you had to fend off a takeover by firms controlled by Harry Jayawardena. How does it now feel to be heading a holding company under his leadership?

A: Well, at that stage if I can recall, some of the DCSL group companies held shares within the permitted share structure for banks, and at that stage the huge controversy was that in view of the shareholding that they held, they wanted a change in the management. As shareholders they felt that they had a right, and that was what got into controversy. The vision at that time for DCSL, and at that stage there were about two banks involved, I think even DFCC held shares, was to make it a very large financial conglomerate, in terms of making a very large bank, putting together two or three other banks, which I felt was even at that stage, the way to go. We can’t be a bank within the 500; we can certainly move up, there is room for consolidation

Q: What synergies do you bring into the Group?

A: Well, in the bank also you deal with different segments of finance. One is the corporate sector, where you get to know different types of businesses. I have had associations and knowledge of small businesses, SMEs and going through to the large corporations. I have seen in the last 29 to 30 years, some of these companies starting off very small with the bank, and becoming very, very large companies. I have seen them grow. I have experience in some of their decisions that they took for expansion, because we have assisted them. I think all that experience can be brought into play here because this group has varied exposure to different types of industries – plantations, textiles, and now finance, which certainly I can contribute to greatly. Then there is insurance, again Commercial Bank has also been involved in various insurance ventures, so that experience can be put to good use in the group.

Q: You mentioned Pelwatte Sugar, but wasn’t Pelwatte sugar taken over by the Government for reasons cited as underperforming?

A: Sorry. It was taken over by the Government, that’s again a misnomer because what was taken over was the land. The company per se remains. Our investment of 48% remains in Pelwatte Sugar. The main asset of the company has been taken over by the Government, so there’s nothing that the directors or whoever can do, but this is again something that needs to be contested.

Q: Have you been compensated for this, if so what’s the value of the compensation?

A: Not as yet, they have called for compensation to be paid; they have called for proposals of submission to be made, but as yet nothing

Q: What is your view on Government takeover of so-called underperforming private companies?

A: Well, I think one has to draw a distinction. If there is a company which would affect the economy and if it’s underperforming, they certainly need to take some actions. So, I can’t say it’s wrong, but to take over performing companies is unimaginable, particularly listed companies where minority shareholders, I’m not talking of only DCSL or Melstacorp which has a large stake, there are so many other small shareholders.

The company, which was within eight months turned around to show about Rs. 800 million profit, being taken over, to me, is not accepted. But having said that, in that portfolio of companies they took over there may be companies which they need to have taken some action against, because they have gone into a dormant stage. So, if the Government didn’t intervene, those assets could not be realised and sold off and the companies would have gone into liquidation. Certain things may have been justified, but there were other cases like Pelwatte where I just could not see any reason.

Q: What are the future plans for Melstacorp and where do you see it in the next five years?

A: Well, the plan for Melstacorp is to consolidate all these companies under the Melstacorp umbrella and make it a very large conglomerate, so that we would be serving all forms of the social strata. We will be having a variety of products, and our product range would be growing. We would be touching different social strata and the company would be playing a very significant role in the economy. So in the next five years we see that evolution taking place.

Q: Does Melstacorp plan an IPO?

A: No. I can’t say that will happen in the very near future. We still have to complete the transfer of the residue of shares, which are still to be done, and then there may be other mechanisms that we need to employ before we consider an IPO. So, not in the short term, but may be maybe in medium to long term, yes, it may be possible.

The Board of Melstacorp Ltd., comprise of D.H.S Jayawardena (Chairman),  A.L Gooneratne (Managing Director), R.K Obeyesekere, C.R Jansz, N. De S Deva Aditya, C.F Fernando, Dr. A.N Balasuriya, Capt. K.J Kahanda,  and (Ms) V.J Senaratne  (Alternate director to N. De S Deva Aditya)