Writeup Case

Valuation and investment size wise, Blackgem valuated Surya tutoring at 16x profit after tax with a Rs. 150 crores investment. It would seem that Blackgem is a better deal, but along with this comes a 25% stake in the company and control of two out of the four preset board seats, and also does not have an employee stock option plan included in the term sheet. This negates Mr. Sharma’s super majority stake in the company, and offsets the benefit of the investment size that Blackgem is offering.

One of the main characteristics of Blackgem’s deal is that Mr. Sharma will retain ownership of the Surya brand, and not the company itself. Also, Blackgem has no enforced conditions on the usage of funds, which the Promoter more freedom in selecting opportunities in where to best use the investor funds. There is no upper cap on the promoter’s compensation, which works for the benefit of the promoter. Dividends is also a significant factor in the Blackgem deal, as it requires an 8% non-cumulative dividend.

Liquidation terms also works against the Promoter, as the company is required to pay the original price of Rs. 300 plus 4% per annum for the Series A Preferred stocks of the Investors, even if market might dictate that current share price has been diluted or is less than the original share price.

The drag-along condition in the term sheet greatly disadvantages Mr. Sharma, as he would effectively lose control of his company. If a majority holder of Series A Preferred stocks will want to sell the company to a third party, Mr. Sharma will have no choice but to comply, which might be contrary to the desires and plans Mr. Sharma has for the future of Surya Tutoring. It does, however, include a Rs. 150 crores life insurance for Mr. Sharma which has the company as the beneficiary, so it does provide a contingency cushion in the event that something undesirable might happen.

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