Finlays Colombo Goes Private To Break From The Past

According to Chairman Kumar Jayasuriya, the firm was being fair to minority shareholders when it delisted from the stock exchange earlier this year to focus on long-term strategies, but policy uncertainty is holding back its parent firm global multi-billiondollar conglomerate Swire Group from deepening its exposure in Sri Lanka

Finlays Colombo believes going private will reverse a string of bad luck and limited success the firm just could not shake off being a listed firm for 23 years.

The firm is a unit of James Finlays UK, which is owned by multi-billion-dollar MNC Swire Group UK, with earnings of more than $7 billion in 2014. However, Finlays Colombo’s prospects have been limited in many ways.

In the 1970s, the government expropriated much of its land, which slowed investments. Then, in the 1990s, its parent James Finlays UK divested its global businesses in financial and offshore oil services to focus on tea, a decision now hurting Finlays Colombo, with its biggest markets in the Middle East in turmoil. Later, a decades-long conflict slowed down investments further, with Finlays UK investing in a tea concentration plant in Kenya instead of Sri Lanka.

Finlays Colombo was incorporated 120 years ago in colonial Ceylon around the same time as John Keells and Aitken Spence, all three as tea growers and traders. Today, Finlays Colombo finds itself lagging behind its peers unable to diversify as they did—its earnings at end-2014 stood at 3% that of John Keells and a tenth of Aitken Spence. Finlays Colombo made an 8.8% return on equity compared with 11% of John Keells and 10.6% of Aitken Spence. When Swire Group acquired James Finlays in 2000, Finlays Colombo was able to expand its tea business and diversify to cold storage, environmental services and insurance broking, but tea remains its biggest revenue generator.

Our fate was tied to the parent company, James Finlays, which decided to focus on tea in the 1990s, divesting its interests in financial services, maritime and offshore oil services

Kumar Jayasuriya, chairman of Finlays Colombo, explains the decision to take the company private. He says the group will expand its cold storage business and set up a high-tech factory for value-added tea.

What was behind the decision to delist Finlays Colombo from the Colombo Stock Exchange?
Finlays Colombo’s public shareholding is less than 3%, the rest is owned by James Finlays UK, a subsidiary of Swire Group. When the Securities and Exchange Commission (SEC) came up with the minimum float requirement, the parent company was not keen to dilute its shareholding. The company has been in Sri Lanka for 120 years and was listed on the stock exchange for the last 23. The parent has always taken a more long-term view of the company and this often conflicted with more immediate expectations of minority shareholders, a feature of the two decades or so as a listed company. When the SEC introduced the 20% minimum public float rule, the opportunity presented itself to move out and become a private company again.

Can you give us an example of these conflicting expectations?
We are investing Rs300 million to run our cold storage facility at Welisara on solar energy, which will significantly cut our dependence on the national grid. Once the project is completed, the facility will be the only one of its kind in South Asia. Our electricity bill is around Rs8 million a month, which is a significant percentage of the cold storage facility running costs, so we will make a considerable saving. Also, by reducing our reliance on the grid, we are reducing our impact on the environment. This investment does not bring immediate returns and has a long payback period. The decision could not have been made if we were predominantly a public listed company, because we will not be able to justify the returns to minority shareholders whose time horizon for investments of this nature are shorter.

This was an investment we had to make. Sustainability is the way forward or there is no future. The group has cold storage operations in the US, China, Australia and Vietnam, where some of the facilities are also being converted to run on solar energy.

But is the board really concerned about what less than 3% of shareholders think?
The duty of the board is to all shareholders. They are all equal, irrespective of how many shares they hold. We have always been seen as trying to give all shareholders the best possible returns and to build trust. Balancing conflicting expectations was always a delicate act. By delisting, we are actually being fair by them.

Does the parent company see return on equity improving over the next few years, the reason why it perhaps does not want to dilute its shareholding?
It’s not the returns or share value per se, but the influence it can have on the single shareholder. Finlays Colombo’s board was often torn between two sets of expectations, and with the delisting, we have only one shareholder whose interests will now be our main focus.

In 2014, Finlays Colombo made an 8.8% return on equity compared with 11% of John Keells Group and 10.6% of Aitken Spence. Is the parent company satisfied with this kind of return? Don’t they pressure the board to deliver better results?
There is certainly a push to get better returns, but they are mindful of the challenges of operating predominately in the tea sector, which is at crossroads in Sri Lanka today. The group is reasonably comfortable with our performance. James Finlays and Swire Group are both 200-year-old companies, and reputation is a big deal for them. The focus is mainly on compliance and doing business the right way rather than chasing after returns.

Finlays Colombo, John Keells and Aitken Spence were contemporaries when they were established in colonial Ceylon between 1868 and 1893. Today, John Keells and Aitken Spence have evolved into conglomerates, making bigger profits and better returns. What happened?
Our fate was tied to the parent company, James Finlays, which decided to focus on tea in the 1990s, divesting its interests in financial services, maritime and offshore oil services. In 1983, the parent company divested all its tea plantations in India because of the wave of nationalism that built up from the 1970s. Things were not so bad in Sri Lanka, but we did lose some assets.

finOur stores on Vauxhall Street and several estates were nationalized. Our main office building opposite the central bank was nationalized too. In 1977, the government changed and things cooled down. Since then we have been able to consolidate. However, when a foreign shareholder sees the company’s assets being taken over like that, they are slow to regain confidence and invest.

Our tea exports had grown during this difficult period, so Sri Lanka remained relevant to the parent company, although it divested all Indian tea assets to Tata Group. James Finlays stayed on in Sri Lanka and persisted. We are not as big as Keells or Aitken Spence, but we are still playing a significant role here. There are good reasons why we have not grown as much as the two larger conglomerates – they  became Sri Lankanised, their risk appetites grew and they got into new lines of business.

During the conflict period, the climate was not conducive for investments, but James Finlays invested in the cold storage facility, environmental services, a green tea factory and two regional companies managing tea estates. We also deepened our involvement in insurance. We could have got more investments though during the period if not for the war For example, James Finlays made a significant investment in Kenya on an instant tea plant, a big investment, and Sri Lanka lost out.

What of the policy environment today? Is the company looking forward to exciting times ahead?
We are calmly excited. We expect governance, law and order, and a level playing field for all. If institutions function in an equitable manner, then the group will see opportunities and Sri Lanka will become an important place. I feel they are still watching to see what happens. There are opportunities for sure. For example, the trade deal with India will give companies access to the sub-continent. What we need is clear direction. Stop-start policy making and the recent budget fiasco certainly do not help.

The company has considerable land holdings, any plans for them?
There was a project planned together with John Keells and AMW several years ago, but it fell apart because the new owners of AMW opted out of it. Finlays owns four acres in Colombo and we are conscious that it is for all intents and purposes idle, but we are in no hurry. The time is not right because there are too many property development projects going on in Colombo.

The Land Alienation Bill the previous government brought in was a setback for us because the company was owned by a foreign entity. The present government is willing to look at things differently, and we are confident that when the time comes to invest in the property, we will be treated as any other Sri Lankan company; after all, we have been here for 120 years.

Is Swire Group interested in investing in new sectors in Sri Lanka?
The group is stretched in other parts of the world, especially in property development, aviation and shipping in China and the US. This does not mean that exciting opportunities in Sri Lanka will be bypassed.

Where will Finlays Colombo be in five to ten years?
A lot will depend on how Sri Lanka will unfold over the next few years, but Finlays Colombo will be bigger than it already is. We plan to develop cold storage facilities in other parts of the county and invest in state-of-the-art facilities for downstream value addition in the tea industry.

Should Sri Lanka become a tea hub?
We are strong supporters of the hub concept and Sri Lanka is already missing out on huge opportunities. The global market is segmented and many brands do not even have an ounce of Ceylon tea in their blends. Opening up will help Sri Lanka enter these segments and include Ceylon tea in various blends.

Tell us something about Finlays Colombo’s business lines.
Tea has always been our core sector and is what the Finlays Group is known for the world over. It ( tea) is number one in terms of turnover. The other three pillars are logistics (cold storage), environmental services and insurance broking.

There is serious situation for tea producers and exporters today, but Finlays is spared the turmoil because we always focused on value addition; I doubt there are many companies in Sri Lanka that can boast that 85% of their tea exports are value added. We buy tea at the auctions, blend and package them in various forms for our own brands and those of our customers.

“Finlays Colombo’s board was torn between two sets of expectations, and with the delisting, we have only one shareholder whose interests will be our main focus.”
Kumar Jayasuriya

Our export values did not grow because Syria and Iraq have been difficult to reach. However, because our distributors are resilient and take tremendous risks, consumers still want our teas. Syria is virtually lost, but Syrian communities settled in other parts of the word like Turkey and Jordan still demand our tea brands. We also produce Ceylon Green Tea, which is popular in Russia.

We operate the largest cold storage facility in South Asia. We have a capacity for 40,000 tonnes in six million cubic feet of refrigerated space, storing anything from margarines and butter, ice creams, chicken, sausages and processed meats, cheeses, fruits, and pharmaceuticals. The chances are that most products found in household refrigerators were stored and distributed from the Finlays facility. Some of our biggest clients include Elephant House, Unilever, Prima and Chrisbro.

In environmental services, we are the franchisee for Rentokil, the largest pest control service providers in the world. We have three lines of business – pest control, washroom hygiene and timber treatment. In pest control, we are the market leader with industrial, office and household products and services.

We are Sri Lanka’s largest property insurance broker. We have relationships with foreign insurers, brokers and consultants, so we have been able to offer the local market with sophisticated insurance products that probably do not exist here. We also operate in the Maldives. We handle the entire insurance needs of some of the largest corporates in both countries.