Stock market investors weren’t too enthused on day 2 (on Tuesday), after lifting the price of diversified industrial firm Murli Industries on Monday based on reports of the company being in talks with cement giant Cemex to sell its cement unit for as high as $550 million or over five times the company’s market capitalisation. The stock price fell 3.88% on Tuesday.
Murli disclosed on Tuesday: "Large foreign players of the industry have expressed their interest in the cement assets at Chandrapur of the company and the management of the company is in discussion and negotiation with the parties. It is in the preliminary stage. The management is planning to utilise the proceeds so received to repay the existing loan of the company and also to roll out the new plants in the states of Rajasthan and Karnataka where the company is having all the clearances and land for the same."
The firm which is into various businesses including solvent extraction & edible oil, paper, power started cement business last fiscal. Even as the new plant with capacity of 3 million tonnes contributed just marginally in terms of revenues and was in operational loss it had stretched the company’s profitability with debt on the books.
This is the tricky part as the company has disclosed its plans to use sale proceeds from its existing business to set up new plants each with a capacity of 3 million tonnes. It could well be one of its kind transaction where a firm diversified into a business only to sell the new plant to finance two new units of same business.
While the previous business decision to enter cement could have been at the right time when prices were high and economic scenario looked bright, the situation changed dramatically over the last three years. However, what could still justify the group’s interest in cement business is projections of high demand going forward as the country’s creaking infrastructure needs massive investments as the economy develops further.
If Murli indeed goes ahead with using sale proceeds to set up other cement plants it would also surprise analysts who expect the company to use the money to expand its core business.
The deal, if it goes through, will herald another series of consolidation within small and mid-sized cement firms following the big bang deals five years ago. Then Holcim struck big transactions to acquire ACC and Ambuja Cement while AV Birla group snapped L&T’s cement business and recently merged all its cement operations under a single firm. These two groups now control over half of the otherwise fragmented cement market in India.
Among the recent transactions, buyout giant KKR put in $170 million in a subsidiary of public listed Dalmia (Bharat) Cement. Another deal involved French firm Vicat purchasing 51% in Bharathi Cement Corp, a company owned by politician YS Jagan Mohan Reddy.
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For Cemex this could be an easy entry route to India. The company had earlier had various failed moves to strike a deal for a market entry and has seen other competitors march ahead. Besides Holcim that has a leading position, France’s Lafarge also has a mid size presence after having acquired the cement business of Tata Steel over a decade back Lafarge has over 6 million tonnes of production capacity.
Cemex had reportedly also tried to strike a deal with Hyderabad-based Penna Cement even though talks did not fructify into a transaction. It was earlier said to be in negotiations with Mehta Group’s Gujarat Sidhee Cement and had also discussed a deal with Mangalam Cement but those deals never worked out.
But the world’s third largest cement firm needs to cut into the market in India to better compete globally with its bigger global rivals Holcim and Lafarge.
As per an ET report, the investment-banking unit of equity brokerage Motilal Oswal (that also mediated Shree Renuka Sugars in its mega Brazilian acquisition early this year) is advising Murli Industries along with Macquarie Capital. Bank of America Merrill Lynch is advising Cemex, as per the same report that added Lafarge and Italcementi had also discussed a proposed deal with Murli.
If the deal indeed is struck at $550 million, it will value the transaction at $183/tonne. This is not cheap but not too high either if other deals in the industry is anything to go by. For instance, Vicat is estimated to have acquired majority stake in Bharathi Cement at around $200 a tonne.
As per a Crisil-Infac report in January 2006, Holcim paid as much as $227 per tonne for Gujarat Ambuja, which was one of the highest ever. This was 2-3 times what others had paid-- Lafarge-Tata Steel, Lafarge-Raymond, Italcementi-Zuari, Grasim-L&T, and twice that Holcim itself paid for ACC.
Given that Cemex has been going ahead with aggressive deals globally over the last five years, it could well pay that kind of premium to enter the world’s second fastest growing market!