How Hayleys complements Dhammika Perera’s aggression

A division within the listed conglomerate counters the co-chair’s fondness for debt-funded acquisitions

Dhammika Perera-controlled listed diversified company Hayleys PLC (Rs111 billion in revenue) grew its topline 300% in a decade to March 2017, more than twice as fast as it did in the six years prior to that. This growth in group revenue—which places Hayleys ahead of listed John Keells as the largest listed conglomerate—was driven by a series of acquisitions after Perera took control of the 130-year-old company in 2008.

Perera, co-chairman at Hayleys, is reluctant to dilute the 47.53% holding in his name in the group (Perera indirectly holds another 2.91% stake in Hayleys through Vallibel One, a listed company he controls). This means acquisitions are funded by expensive debt rather than equity. The group’s debt has risen four-fold in ten years to Rs44.6 billion at end-March 2017. Finance costs amounted to Rs3.8 billion that year, compared to just Rs0.8 billion ten years ago. The Rs11 billion acquisition of 62% in listed Singer Sri Lanka (the largest single transaction to-date on the CSE) in September was funded entirely from bank loans.

Acquisitions help the group grow faster. “That’s what acquisitions do. Otherwise, it would have taken us 3-5 years to achieve this growth,” says Head of Strategic Business Development Unit (SBDU) at Hayleys PLC Manohari Abeyesekera.

“We’re fast tracking growth through acquisitions. Our role is to be that little voice in the head that cautions and guides decision making at board level,” she says.

The SBDU was established ten years ago to advice the Hayleys board on acquisitions, and tempering Perera’s aggressiveness with patient due diligence is not always easy. Sometimes, there’s pressure to act fast, especially when there are rival bids. “But, we have to ensure that all the bases our covered. We don’t always tell the board what they want to hear and they expect no less,” she says.

The SBDU was established following a bitter experience, to advise the board on future acquisitions. It was also decided that Hayleys would only always acquire a controlling stake

Abeyesekera declined to comment on the Singer Sri Lanka acquisition pending the mandatory offer. The transaction has overextended the group, which is looking at divest idle land assets.

Excerpts from the interview are as follows:

TAMPERING THE AGGRESSION
The Chairman and the Board of listed conglomerate Hayleys PLC set up the Strategic Business Development Unit (SBDU) in March 2007, a dedicated unit to conduct feasibility studies for large investments, carry out due diligence and provide an independent review on proposed acquisitions and mergers.

For over a century Hayleys mostly grew organically by adding value to Sri Lanka’s natural resources – coir fibre, rubber latex, tea etc. In 2005, Hayleys ventured into a joint venture with an Italian company to manufacture and export textile-based fibre mats. However, Hayleys invested in only a 49% minority stake. The Italian partners were in full control, where the local operations were running at a loss. The joint venture was liquidated. The SBDU was set up as a result of this bitter experience to advise the board on future acquisitions This also resulted in Hayleys only investing in controlling stakes, at least a minimum equity stake of 51% in its acquisitions. The unit closely works with the Chairman and Board in carving out Hayleys Strategies.

In 2008, Mr Dhammika Perera acquired a controlling stake in Hayleys and he brought in a lot of dynamism in terms of acquisitions. Some analysts used to call us a white elephant because we had a lot of assets but revenue and profits were not growing. This was because there was no dominant shareholder. The management was powerful. Board meetings were held quarterly. Perera changed the easygoing culture. He brought in a sense of dynamism. He insisted on monthly board meetings so progress can be monitored. The management was on their toes to deliver growth.

At the time, when the change of directorate happened, group turnover was Rs33 billion and profit was about Rs700 million. Today, we are the largest listed conglomerate with revenue of Rs111 billion, growing 300% in eight years. Our latest forey, the acquisition of Singer Sri Lanka – would make Hayleys a $ 1 billion company in terms of revenue. That’s what acquisitions do. Otherwise, it would have taken us 3-5 years to achieve this growth. We’re fast tracking growth through acquisitions. Our role is to be that little voice in the head that cautions and guide decision making at board level.

NOTABLE ACQUISITIONS
Just after the ethnic conflict ended in 2009, the board wanted us to look at acquiring the listed Ceylon Continental Hotel. It was the oldest five-star property in Sri Lanka built in 1975 for the NAM Summit in Colombo. During that time, it was a large acquisition at Rs1.9 billion, where we were able to raise funds within a short period of time. The hotel was rebranded as The Kingsbury and further investments were made to refurbish the 40-year hotel property.

Manohari Abeyesekera, Head of Strategic Business Development Unit (SBDU) at Hayleys PLC

We had just two days to conduct feasibility and due diligence, because other investors were interested in the hotel. There was pres sure from the board, but the SBDU had to cover all the bases. The decision to acquire a company or not, and the responsibility, lies with the board. Often, decisions are mostly gut feelings, but the SBDU has to ensure rationality prevails. After we acquired the hotel, an Indian investor offered to buy it from us for twice the investment, because it was a good investment to have. The tourism sector has tremendous potential. Today, the hotel makes Rs3 billion in revenue annually.

In 2016, we invested $23 million for a 51-room resort in Kuda Rah, Maldives which is managed by our resort hotel chain Amaya. We’re currently refurbishing the resort, where the Maldivian political climate is far from stable, however, we are confident of generating returns over the next few years. Average room rates for Sri Lanka is around $200-250 per night. In the Maldives, it’s still $400-800, that’s indicative of the potential of the market there.

In 2010, the post-conflict conflict construction industry was booming the Hayleys Board decided to acquire Alumex, then a private family-controlled company, for Rs2.2 billion. We listed 10% of the company a few years ago at Rs14 a share. At that time, the stock market was not doing too well and we found it difficult to sell that 10% parcel. Investors were not too keen to buy at that price. Today, Alumex trades at Rs23. The company we acquired seven years ago is today making a profit of Rs1 billion.

Few analysts argue that Hayleys may be too diversified. We’re only in sectors that generate value and demonstrate potential for growth. Each segment from agriculture, hotels, logistics, manufacturing and plantations is headed by a separate CEO and management team. There is focus and accountability. The SBDU is not central command unit. We look at acquisitions , restructuring of troubled businesses and act as the Investor relations unit of the group.

Hayleys was traditionally a manufacturing company incorporated by Chas. P. Hayley in 1878, where initially it commenced its operations by trading coconut fibre in Galle. Our philosophy is to have long-term business partnerships which has changed hands over the generations. We are there for the long term.

In 2008, group turnover was Rs30 billion and profit was Rs700 million. Today, we are the largest listed conglomerate, with revenue of Rs111 billion, growing 300% in seven years

INVESTMENTS GONE BAD
Hayleys group has invested over Rs100 billion in various acquisitions over the last decade. The SBDU is also responsible for restructuring struggling companies in the group. We’ve had two such experiences in the fibre and textile manufacturing businesses.

A few years ago the fibre business was making losses , and today it has turned profitable.

When we looked at the business it became clear the problem was it was maintaining lean inventory. Management gurus suggest lean inventories—minimum stock—reduces costs and debtors. But the coconut fibre business is cyclical. Peak season for sales in Europe and the US correspond with the monsoons here when fibre was in short supply forcing us to buy at high prices. Ideally we should have been stock piling during the dry season. We were also exposed to few buyers in Europe and US who tanked during the global financial crisis. We expanded the client base and today, the coconut fibre export business generates an annual profit of about Rs300 million.

Hayleys Fabric, a textile manufacturing business, had some governance issues a few years ago, where we had to write off significant amounts of inventory. There was pressure from banks and bargain hunters were making offers to buy the company at low prices. We persisted with the restructuring, infusing equity to the company along with strategic investors and today Hayleys Fabric is faring reasonably well. It’s not just the profits per se, we are creating over 1000 employment opportunities at Horana.

It’s the same with plantations we control. Despite the challenges facing plantation businesses, we find ways to add value and grow. We introduced export crops like gherkins for exports. We are the largest supplier of pickled gherkins to Japan and food companies like Burgher King and Subway. We have invested on an instant extraction plant so we can develop value-added teas and aromas We are among the largest suppliers of activated carbon and gloves in the world. The next step is to create our own global brands Building brands is not easy. It takes time, and money, to build brand loyalty. Importantly, developing a brand can be risky because it means competing against customers so revenue will take a hit. That’s a dilemma for us. We can acquire brands, but that’s an option too expensive.

What we are doing instead is acquiring distribution and marketing companies, wich helps improve margins for us because we eliminate the middleman.

HAYLEYS OF THE FUTURE
We don’t believe strictly on what is in paper – the three-five year plans. When an opportunity comes, we must be ready to grab them. It was the same with Singer. Actually, we did have a goal to become a $1 billion dollar company in three years but it’s already happened with the Singer acquisition.

We’re overextended by the Singer Sri Lanka acquisition. Now we will take a breather and let our investments generate revenue and profits to service the group’s debt

Over a century, Hayleys has changed from an agriculture company to diversified group of companies mainly in services. Hayleys Advantis, a logistics company, is the top earner for the group with shipping and logistics, trucking and warehousing operations where we are expanding into the Asian region. E-commerce presents opportunities for growth and this something we are looking at closely.

Renewable energy is another growth sector. Our hydro, wind and solar power plants add 50MW to grid. We are prepared to invest more in this business, particularly wind and solar power. The agriculture segment of the group is doing well.

We’re not just importing fertilizer and farm equipment but exporting value added agriculture products like tropical fruit juices, dehydrated fruits, virgin coconut oil and Moringa powder in capsules which is a super food. We develop and export flowers and seeds. We use drones, precision technology in our agriculture business.