McDonald's India says Vikram Bakshi no longer managing director of JV

ET Bureau Aug 31, 2013, 11.03AM IST

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(McDonald's India today)
NEW DELHI: McDonald's, the world's leading burger and fries chain, has ousted its
near-two-decade partner, Vikram Bakshi, from the post of managing director of their
equaljoint venture company, signalling adramatic souring of relations between the
fast-food company and its most visible face in India.
In a tersely worded public notice that was published in select newspapers on August
30, McDonald's India said Bakshi had ceased to be the managing director
ofConnaught Plaza Restaurants (CPRL) 'pursuant to the expiration of his term on
July 17, 2013'.

The notice added that Connaught Plaza Restaurants was now being managed by its
board of directors.
The joint venture company runs 154 McDonald's outlets in northern and eastern
parts of India. "The nominees of McDonald's at the board meeting on August 6 did
not support my re-nomination as MD. It would be best to pose this question to
McDonald's," said Bakshi, in an emailed response to ET's query about the reason for
his removal.
"The matter is in legal domain and I continue being a Director & JV partner
with control of 50% equity in the joint venture company," he said. Bakshi and
McDonald's have two nominees each on the four-member boardof the company. For
any board resolution to be passed, a majority of the directors must vote in favour of
the proposal.
A McDonald's spokesperson declined to divulge further details about Bakshi's abrupt
exit. "The public notice gives all the correct details, including how the company is
being managed. We have no further comment," said Liam Jeory, vice-
president, corporate relations, McDonald's Asia/Pacific/Middle-East/Africa.
A senior industry executive said differences had arisen between McDonald's and
Bakshi over control and ownership of the joint venture company.
Bakshi denies governance issues
While Bakshi was keen to buy out McDonald's, convert his company into
a master franchisee, and raise funds through an IPO, the US company wanted its
Indian partner to sell out and take full control of the company.
Bakshi said he was not in a position to talk about confidential discussions with
McDonald's. "I must point out that all initiatives were aimed
at optimising opportunities and value for the McDonald's brand and business in
our market in the north and east of India," he said, in response to the specific
question on his desire to buy out his American partner and do an IPO.
He denied rumours about governance issues in the running of CPRL and said no
funds had been diverted to his personal real estate business. "There are no funds
diverted for personal business. On the contrary, our joint venture has benefitted by
subsidised leasing of several properties that are profitable and beneficial to the
overall business.
At each instance of our operations, our joint venture has followed a well-laid process
of approval by the McDonald's development team. Further, these transactions have
been duly approved by the board of directors," Bakshi said.
For the year ended March 31, 2012, CRPL had clocked revenues of Rs 490 crore,
and a net profit of Rs 6.4 crore. The total debt of the company stood at Rs 127 crore.
In addition to Bakshi, his wife Madhurima, and two McDonald's representatives
Obert Larson and Aysel Melbye serve on the board.
McDonald's, which set up its first store in India in 1996, had entered the country
through two joint ventures. While the joint venture with Bakshi ran outlets in the
northern and eastern parts of India, the second joint venture with Mumbai-based
businessman Amit Jatia operated stores in south and west India. In 2011,
McDonald's sold its stake in the second joint venture company
Hardcastle Restaurants converting it into a master franchisee operation.
It is understood that Bakshi was pressing for a similar arrangement for some time, as
he wanted to raise funds through an IPO.
For the last 17 years that McDonald's has been in India, Bakshi has been the face of
the company. While Jatia has kept a relatively low profile, and no senior McDonald's
functionary has given a media interview in India in the past decade or so, Bakshi has
been both vocal and visible.
Just a few months ago, he was quoted in the media as saying CPRL will invest Rs
500 crore to double its total number of outlets to 300.






Vikram Bakshi & Amit Jatia: A tale of McDonalds two
franchise partners in India
John Samuel Raja D & Chaitali Chakravarty, ET Bureau Sep 24, 2013, 04.25AM IST
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(A case in point was India,)
McDonald's entered India in 1995 via two partners. It playedball with Amit Jatia, but is playing hardball
with VikramBakshi. The way the two partnerships have unravelledfinancially, structurally,
behaviourallyare as different as chalk and cheese.

Vikram Bakshi is not lovin' it. For 18 years, he has been the corporate face of McDonald's in India,
and now his American partner, claims Bakshi, wants to shame him and then swallow him, that too
without giving him his due.

In contrast, Amit Jatia is lovin' it. On a video conference call from his office in Mumbai, Jatia,
McDonald's other partner in India for the same duration, leans back into his chair, and chimes that his
relations with McDonald's are steadfast, the business is growing well and the stock market is noticing.
For the $27.5 billion company that prides itself on churning out burgers and fries with immaculate
consistency, the contrast in the current state of being of the two men who have built its business in
India is noticeable.
If Bakshi is all outrage, Jatia is all poise. If Bakshi speaks of McDonald's with acrimony, Jatia speaks
of amiability. If Bakshi accuses Jatia of instigating McDonald's, Jatia politely declines comment. If
Bakshi is counting the wealth he could lose because of the hostilities with McDonald's, Jatia
is basking in the glow ofnew wealth.
Those
feelings of contrast are not new, though. They have been simmering in the cauldron of corporate
actionson the part of all three sidesover the last five years. "It's clear that they (McDonald's) don't
see a future with Bakshi," says a former McDonald's India official, on the condition of anonymity.
A restaurant industry veteran, also speaking on the condition of anonymity, adds: "They (McDonald's)
would rather have a subservient Indian partner like Jatia for one half and manage the other half on its
own," he says. The current state of flux traces back to 1995, when McDonald's entered India through
an arrangement that was not its preferred way of installing its golden arches here, there and
everywhere. Difference in Structure
McDonald's, globally, does not like to own its ventures or operate them. Its preferred model is a low-
risk, low-hassle one: licence out its good name for a fee to a local player; on top of that, charge a
royalty linked to sales. So, the more the outlets sell, the more money McDonald's makes. Of its
34,000 outlets in 118 countries, 80% are through this franchise route.
But when it entered developing countries, McDonald's often did so via the ownership model. A case in
point was India, where it entered in 1995, with two 50:50 joint ventures, one with Bakshi and the other
with Jatia. "India then was not a hot market that it has become in the last few years," says Harminder
Sahni, managing director, Wazir Advisors, a retail consultancy.
Yet, even in India, McDonald's hedged its bets. Rather than have only one partner for all of India, it
opted for two partners and carved out the country among them. Bakshi was given north and east,
Jatia west and south. This geographical responsibility was largely synonymous with where their other
business interests were located.
Both Bakshi and Jatia had a footprint in real estate. "A strong brand and leader like McDonald's,
generally, won't like to have a partner from the foods or the QSR (quick service restaurant) business
wherein they discuss and debate every issue," says Sahni. "The partner may believe that it too knows
the business while they don't. So, it's better to have non-industry partners."
Although Bakshi is widely known as the corporate face of McDonald's in India, he is a player in real
estate in the National Capital Region, and beyond. Says a real estate consultant, on the condition of
anonymity: "He is overtly aggressive, obsessed with nitty-gritty. He lacks vision as a business leader
and is hard to do business with because he cites outrageous terms."
Bakshi has a scattered portfolio of properties that pivot around the hospitality business: for example,
the Savoy Outlet Mall in Manesar, the Savoy Greens in Karnal...In Delhi, he owns, among many
properties, the Mohan Dev Building on Tolstoy Marg, the building in Connaught Plaza that houses
Wimpythe fast-food joint that was, in some ways, a precursor to McDonald's in the city. "Amit is a
shrewd businessman and Vikram an emotional businessman," says the restaurant industry veteran
quoted earlier.
With both, McDonald's signed a 25-year joint venture agreement, which would run till 2020. Apart
from sourcing from the same suppliers and coordinating for marketing spends, the two JVs did not
interact much. Structurally, there was no difference between the Bakshi and Jatia ventures in the first
15 years.
This changed in May 2010, when McDonald's decided to sell off its shares in the Jatia venture in
favour of its Indian partner.
This was the exact opposite of what, says Bakshi, McDonald's was asking of him around the same
time. A petition filed on September 9 by Bakshi with the Company Law Board (CLB), the first port of
call for corporate disputes, says that twice in 2008 McDonald's offered to buy him out, but he refused.
According to Bakshi, McDonald's is trying to buy him out again, this time at the behest of Jatia. That is
the reason why, he adds, his tenure as managing director has not been renewed (announced via a
public notice on August 30), why McDonald's is citing irregularities and is objecting to certain
transactions done with Bakshi's other businesses.

To a detailed questionnaire, Danya Proud, director of corporate relations at McDonald's Asia
Pacific Middle East & Africa, replied: "Thank you for your inquiry. However, as we have stated
previously, this is an internal matter, and we have no further comment beyond what is outlined in the
public notice (stating that Bakshi was no longer MD)."
In a letter dated September 3 to McDonald's, Bakshi has accused the company of "discriminatory and
oppressive behaviour" to "fiscally disable us by hook or by crook, eventually forcibly causing us to sell
out" and that it has "entered into a conspiracy" with Jatia.
Difference In Strategy
In May 2010, in the 15th year of its 25-year pact, McDonald's entered into a new arrangement with
Jatia. It sold its 50% stake back to Jatia, and that JV moved to the American company's preferred
mode of franchise fee and royaltya transition McDonald's has been making the world over, with
India (the Bakshi venture) and China being the exceptions in the developing world today.
Filings with the Ministry of Company Affairs show that McDonald's received next to nothing for that
stakesale. It invested Rs 108 crore (Rs 15.5 crore as equity and Rs 92.5 crore as preference shares)
in the Jatia venture, Hardcastle Restaurants.
It realised just Rs 10.8 lakh and booked a loss of Rs 107.9 crore.
When asked why McDonald's sold cheap, Amit Jatia, vicechairman of Westlife Development, the
company that now controls Hardcastle, told ET: "It is not completely correct." He declined to
elaborate, only adding: "We would not like to revisit this. It's a private deal between us and
McDonald's."
On August 16, 2013, Jatia effectively merged the McDonald's business into a listed shell company of
the promoters, Westlife Development. The Westlife stock has shot up from Re 1 in June 2009 to hit
an all-time high of Rs 416 on August 21, 2013, amid thin public shareholding and trading among the
promoter family, raising concerns of insider trading and price rigging. "Many penny stocks exhibit
these characteristics and are kept listed as shell companies for the purpose of reverse listing other
companies," says Shriram Subramanian, founder of InGovern Research Services, a proxy advisory
firm. "I doubt Sebi and the stock exchanges scrutinise penny stocks rigorously."
Subramanian points out that there were inter-se promoter transfers at around Rs 40 per share in
March 2012 and Rs 150 in December 2012, against the traded price of between Rs 10 and Rs 40.
"The inter-se transfer at such a high price may have resulted in capital gains tax to the individual, had
the trades not been executed on the stock exchange," he says.
According to Jatia, the transfers were part of the promoter group restructuring as a part of the overall
consolidation process. "I don't see any big deal with it," he says. "I don't need to explain to the public."
Asked whether it was done to bypass Sebi's threshold norms for illiquid stocks, he says: "110%, it's
not done to bypass Sebi." On September 28, Westlife, in which the promoter group currently owned
62% as of June 30, had a market capitalisation of Rs 5,448 crore ($872 million), largely derived by
unlocking value.
Difference In Valuations
This has become a valuation benchmark of sorts for Bakshi to discuss any exit. His CLB petition says
that McDonald offered to buy him out for $5 million in August 2008 and $7 million in November 2008.
In 2009, Bakshi commissioned Grant Thornton to value the JV, and it computed a price of $331
million.
In the same petition, Bakshi says the recent action by McDonald's is intended to "coerce" him to sell.
A clause in the JV agreement suggests that the removal of Bakshi as the MD gives McDonald's the
right to buy his stake. This clause states: "(McDonald's can buy if) ...partner terminates or suffers the
termination of his relationship as managing director of JV company, other than by reason of his death
or incapacity."
Besides the cal l option, McDonald's could also invoke a clause in the JV agreement which prescribes
a valuation formula for share transfer among partners and which it waived off for Jatia.
Unlike traditional valuation methods, which are grounded in the future value of a business, the
underpinning of this formula is historical financial metrics of the JV.

A back-of-the-envelope calculation done by ET shows this formula values the Bakshi JV at about Rs
400 crore, way below his expectations.
In the CLB petition, Bakshi says this business has a long gestation period. "We are willing to wait for
another seven years," says an official close to Bakshi not wanting to be named. "By that time, the
valuation would reflect the correct value. The first 15 years is to get the business model right,
thereafter the cash flow increases."

Difference In The Future
After acquiring 100% control, Hardcastle has turned around, with outlets and sales nearly doubling.
From a loss of Rs 19 crore in 2009-10, amid a growing topline, it has posted a net profit of Rs 18.8
crore, Rs 42.5 crore and 30.8 crore in the three following years. In the process, it has overtaken the
Bakshi venture in number of restaurants, turnover and profitability.
Buying out McDonald's has also helped Jatia do things that were not possible earlier. In the 50:50
venture, much of the funds for expansion were coming from McDonald's, as also letter of comfort for
banks to availworking capital loans. For example, in the Bakshi JV, of the Rs 206 crore capital, only
Rs 15 crore came from Bakshi. Likewise, in the Jatia venture, till May 2010, only Rs 16 crore of its
total capital of Rs 124 crore came from Jatia.
Much of the rest came from McDonald's, that too in the form of preference shares, on which the
Indian JV was paying a dividend of bank rate (currently 10.25%) plus 3 percentage points. This
dividend payment, plus other interest costs, ate into the bottomline. After McDonald's exited the Jatia
venture, in 2010, three investors put in Rs 240 crore into a group company that indirectly controlled
Hardcastle, which was used to make Hardcastle debt-free.
Bakshi envisioned something similar for himself. In the past, he's been pushing McDonald's into
expanding faster and also taking decisions proactively. Some of these decisions have not gone down
well the American company: like opening two vegetarian restaurants in pilgrimage areas and allowing
other food brands on the top-floor of a Noida outlet, its largest in India, to name just two. "Somewhere,
down the line, Vikram became too passionate about the brand," says the restaurant industry veteran
quoted earlier. "He forgot that the brand that gave him stature and opened all doors was ultimately not
his."
In his letter to McDonald's, Bakshi says that McDonald's plan is to buy his stake and give Jatia control
over all India. He claims that Jatia even approached him in 2011 for such a deal. "It's not my business
to comment; I will not comment," says Jatia, on whether he is interested in Bakshi's part of the
business. Meanwhile, the rift between Bakshi and McDonald's is set to grow. The 25-year agreement
between the two is not an exclusive one, which means McDonald's can appoint another franchise.
Also, while the JV agreement allows for arbitration in London, the Bakshi camp is saying the articles
of association of the company does not allow for arbitration, and any dispute will have to go to the
Company law Board and then the Indian courts.
All this at a time when the Indian market is growing. With around 320 restaurants and combined
turnover not more than $300 million, the contribution of Indian market to McDonald's global revenue is
minimal. But the growth potential is huge a Crisil report says it will double between 2012-13 and
2015-16, to Rs 7,000 crore. "McDonald's is set to be a far bigger business in the coming years, and
local partners have done a lot to set it up," says Wazir. "And that's what the whole fight is all about."
-With inputs from Ravi Teja Sharma.