Metro AG: In deal season, German cash & carry chain feels the heat in India

The low-profile German cash & carry chain is suddenly finding itself at the centre of controversy as negotiations for the sale of its India business get underway

German chain Metro Cash & Carry may not have been under the spotlight in India all these years unlike American major Walmart, but things changed swiftly in the deal season. Dusseldorf-headquartered Metro AG started making plans for selling its India business (fully or partially) more than one year ago at the peak of Covid-19, but negotiations with potential bidders and investors picked up speed in the last two months or so. And suddenly Metro became the centre of controversy — ranging from an all-out foreign-versus-Indian battle to death threats to top executives.

To put things in perspective, Metro came into India way back in 2003 with the purpose of running wholesale or cash and carry stores. It has stayed on that path for close to two decades without showing any inclination to stray into the forbidden realm of multi-brand retail.

So, what really changed as top-notch transaction advisors, merchant bankers and bidders got talking about a deal with Metro? In the changing narrative, the German group is the new equivalent of FDI (foreign direct investment) in retail, pushing aside Walmart and Amazon for a while. A recent statement by the Confederation of All India Traders (CAIT) explains. Top representatives of CAIT said at a press conference on June 30 that Metro had violated India’s retail FDI norms as well as GST (goods and services tax) registration rules to conduct business in India. According to the traders’ body, the German group was selling directly to consumers under the garb of business-to-business format. CAIT alleged fraudulent use of GST registrations to issue Metro membership cards as well as daily walk-ins.

This is not the first time that such an allegation has been made against foreign-owned cash and carry businesses, whether it’s Walmart, Carrefour or Metro. While multinationals (including Metro in this case) have maintained there’s no violation of rules, instances of membership card misuse cannot be ruled out, according to industry insiders. While 100 per cent FDI is permitted under the cash and carry format, goods can be sold only to businesses and institutions in that category. On the other hand, FDI in multi-brand retail (selling to any consumer) is on hold though the United Progressive Alliance government had permitted up to 51 per cent foreign investment under the policy.

The concerns raised by CAIT are casting a shadow on the deal talks, people close to the transaction pointed out. Traders — who are considered important in electoral politics — have asked the government to investigate the alleged violations by Metro. Another point that it has raised is that Metro should not be allowed to sell to a foreign group, which might carry on with similar violations, thereby hurting the traders’ community in India. The government is examining these complaints against Metro’s business practices, in a shift from its stand till recently that the German group is operating as a B2B platform (cash and carry) according to the rules unlike some others.

Similar foreign-versus-Indian sentiment has also come out in a dramatic twist, according to sources. The CEO and MD of Metro’s India business, Arvind Mediratta, is learnt to have received a death threat from an anonymous person. The physical letter, written in Tamil, to Mediratta, an IIT-IIM alumnus running Metro Cash & Carry since 2016, was traced to Bengaluru. The letter threatens to kill the CEO if Metro doesn’t strike a deal with one of the four named in it. Out of the four, three are big Indian conglomerates and the fourth one is a leading IT firm. People in the know pointed out that from the list of four in that letter, only one was a potential bidder. A person who is aware of the police complaint filed against the “threat” could not explain why the letter was written in Tamil or why it was posted from Bengaluru. “These are ways to mislead the investigators,” another source said. Mediratta now has police protection and has been kept away from the office premises till it’s considered safe.

Mediratta was not available for a comment on the matter, but parent company Metro AG responded to a query from Business Standard. “We take safety of our managers worldwide very seriously and take appropriate measures if required,” the company said in a statement, adding that it wouldn’t want to comment further on the issue.

Sources agreed that the death threat to the CEO is being taken very seriously by Metro AG and that it may hasten the German group's exit from India. In the process, the deal could possibly be sealed at a value lower than what was projected initially at more than $1 billion. According to industry sources, the timing of the two developments — allegations levelled by traders’ lobby and the threat letter to the CEO — coincides with the bids for Metro Cash & Carry and therefore merits scrutiny. Could this be a ploy to depress the valuation of the deal? To that, Praveen Khandelwal, secretary general, CAIT, said: “Not at all. Cash and carry companies are violating all norms to take away our consumers… We will protest against anybody hurting the interest of the traders (estimated at around 80 million pan-India).” He added: “We will raise our voice in case of violations irrespective of whether it’s Reliance, Tatas, Amazon, Walmart or Metro.”

Turning the valuation argument, Khandelwal believes a valuation game is being played out by the stakeholders. “Increase in footfall would mean higher valuation. Deep discounts and flouting of rules help these chains get higher footfall. That’s the game of valuation….” Off record, multinationals talk about an increasing hostility towards foreign companies.

Three companies are said to have given non-binding bids to buy Metro Cash & Carry. These are Reliance Retail, Thailand’s CP Group and American venture capital firm Lightspeed Venture Partners (the largest investor in Udaan). Out of the 20 in the list of potential investors initially, six sent their queries and three non-binding bids. Till the final bids come sometime in September and the expectation is of an all-cash deal, this space could see plenty of action. The roughly $880-billion odd retail sector in India is still attractive, after all.