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Commentary

#Linkfest: Potash De-Cartels, IIP Shadiness, Redbus-ted Exits

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Pavan Srinath tells us about the breakup of the Russian-Belarusian Potash Cartel:

Two big cartels control the global potash trade: the first being BPC, a joint venture formed by the Russian company Uralkali and Belarusian Belaruskali. The second is Canpotex: an association of three Canadian mining companies. Together they controlled about two-thirds of the supply and ensured reasonably high prices in the global market. This is now under threat after BPC broke apart. Any rapprochement between Uralkali and Belaruskali was ruled out in late August when Belarus detained Uralkali’s chief executive officer and charged him with abuse of office. This has since escalated into a diplomatic row and a trade war with Russia, with the latter causing disruptions in oil and milk supplies to Belarus.

On the other side of the world, the Canadian cartel Canpotex is in trouble from another source. BHP Billiton, the world’s largest mining company, is looking to enter potash mining in a big way through the acquisition of a $2.6-billion undeveloped mine in Canada called the Jansen mine. BHP Billiton wants to distribute the potash independent of the Canadian cartel and thus poses a direct threat to its continued existence.

This brings prices down from $400 a tonne to $300 a tonne. India is likely to import 35 lakh tonnes (which would mean a $1.2 billion import bill, mostly subsidized). A 25% drop can save us $300 million in imports, but then it seems we have long term contracts that don’t allow this easily.

For the IIP data, Business Standard wonders about the IIP data: (Note: I’d mentioned that the garment production data was very high in July)

For a few months, even as the overall index suggested stagnation, the garments segment seemed to be performing spectacularly. It might be expected to benefit even more in the new currency scenario. While it did not grow as impressively as in months when the rupee was stronger, it was one of the fastest growing segments in July, clocking 44 per cent. However, as in previous months, there appears to be something of a contradiction between this and the performance of the textiles segment, in which production actually declined by 0.3 per cent in July. So, as before, one might wonder where the cloth to produce all those garments is coming from.

The correlation of “textiles” to “garments” was 0.44 in December 2012, and is 0.26 now, so something strange indeed has happened.

In a note about the Redbus acquisition, it becomes apparent that things weren’t all that perfect in acquisition land, as senior members prepare to exit.

A large part of this exodus may be – from what we’re hearing – because of the fact that employees aren’t pleased with the way Employee Stock Options were dealt, as most of the tangible gains from the acquisition have gone to the founding team (+ few very selected ex-employees, not more than 3 in number). That is, the core group and not employees, who must have obviously been sold the dream as well.

An acquisition of 800 cr. (the number’s not confirmed, by the way) could be through a combination of stock and cash. Since the acquirer (Ibibo) is unlisted, the VCs would have demanded a good amount of cash. If things were done fairly, everyone would have the same proportion of cash and stock.

But in many cases, things don’t work like this. Let us assume only Rs. 100 cr. in cash was paid (the rest was stock). Due to complicated agreements and participating-preferred clauses, the main investors would have taken a bulk of this cash. (A participating preferred agreement could say I get at least 3x my investment, and then I participate in the rest. The cash goes to pay for the 3x, they participate in stock)

The remaining small amount of cash goes to whoever’s already got shares (founders). The VCs, option holders and founders get the rest of the compensation in the acquiring company’s stock. Which, most likely, is vested over a longer period. This ticks off the stock option holders because they don’t get anything from the acquisition, while they perceive the founders got something.

If this is the case with the redbus story, it comes to an interesting twist. Whatever the non-founder employee’s argument – I don’t agree with it because the founders took greater risks, but still – they have the option to get up and leave. And that’s what they are doing. While this is an ecosystem issue (why will people trust options in startups anymore?), this still means one simple thing: not enough people are making big money off Indian startups.