UltraTech Cement Ltd has struck a deal to acquire two units of Jaypee Cement Corporation Ltd located in Gujarat at an enterprise valuation of Rs 3,812 crore ($590 million). The deal will help UltraTech, the single-largest cement firm in the country in terms of capacity, to overtake Swiss construction materials giant Holcim which controls Ambuja Cements and ACC, two of the top four cement firms in the country.
The deal is for acquisition of an integrated cement unit at Sevagram and a grinding plant at Wanakbori in Gujarat which have 4.8 million tonnes per annum (mtpa) capacity.
Kumar Mangalam Birla, chairman, UltraTech Cement Ltd, said, "With this acquisition, the company's current capacity increases to 59 mtpa. With projects underway, it will stand raised to 70 mtpa by 2015.”
Holcim, through its two large cement firms together, has capacity of 58 mtpa in India.
UltraTech has paid approximately $124 per tonne for the asset. This is in line with market valuation of large cement firms in the country but is at a significant premium to the another recent deal in the sector.
Last month, My Home Industries Ltd (MHIL), an equal equity joint venture between Irish building materials major CRH and Hyderabad-based My Home Group, signed a deal to buy Sree Jayajothi Cements Ltd (SJCL) at an enterprise value of Rs 1,400 crore ($230 million then). This deal was struck at around $72 per tonne.
While Standard Chartered was the transaction advisor for the deal, Axis Capital was the independent fairness option provider, Amarchand and Mangaldas was the legal advisor and Bansi S Mehta and Co was the valuation advisor. Vaish Associates was the legal advisor and Sobhagya Capital was the merchant banker for Jaiprakash Associates.
What it means for the Jaypee
Jaypee Cement is a wholly owned arm of diversified firm Jaiprakash Associates. The asset sale is part of the strategy of the debt-laden firm to deleverage the balance sheet. Under the transaction, the units will be demerged from Jaypee Cement. UltraTech will also take over the debt worth around Rs 3,660 crore from the books of the demerged entity and related assets and will also issue fresh shares not exceeding Rs 150 crore to Jaiprakash Associates as part of the deal.
The third-largest cement manufacturer in the country by cement capacity, Jaypee Cement has a production capacity of 36.8 million tonnes and a consolidated debt burden amounting to a whopping Rs 45,000 crore. Through this deal it is essentially offloading debt worth Rs 3,660 crore.
Jaiprakash Associates had demerged its Andhra Pradesh and Gujarat cement units and merged them into the cement subsidiary called Jaypee Cement, which is building a 3 mtpa unit in Karnataka. Earlier Irish cement maker CRH was in the race to acquire some of its assets.
What it means for UltraTech
Besides adding capacity and emerging as the top cement producer as a group pipping Holcim, the transaction will help UltraTech take advantage of carried forward business losses and unabsorbed depreciation of the Jaypee Cement units.
OP Puranmalka, whole-time director of UltraTech, said, “Besides giving us a stronger production base in Gujarat to serve the local market, it also bolster our coastal footprint, enabling us to cater to other regions of India and exports.”
The acquisition will help UltraTech increase its presence in Mumbai, Kochi, Mangalore and Sri Lanka besides Gujarat.
In 2007-08, Grasim, the flagship unit of Aditya Birla Group, had offloaded its entire stake in Sree Digvijaya Cement Company Ltd (SDCCL) to Cimpor. Since then the group has lost market share in Gujarat and the nearby region. Grasim had acquired L&T’S cement business to create UltraTech.
Kailash Birla, chief financial officer of UltraTech said, “We will be able to finance the debt (being added) 300 basis point lower than the existing interest payout on the loan.”
The debt to equity ratio of UltraTech will increase to 0.54 after the transaction compared with 0.31 at present. Its net debt to equity ratio will also almost double compared with 0.3 as of now.
An analyst covering the sector, who did not wish to be identified, said, "In the long term it is a good transaction as a non-serious player is eliminated from a key zone for cement sales. The debt funding will stretch UltraTech’s balance sheet a little at this moment."
Ahead of a formal announcement of the deal, UltraTech Cement scrip rose 1.6 per cent to close at Rs 1,732.3 a share in a flat Mumbai market on Wednesday.
The assets are being acquired at their replacement cost, according to UltraTech executives.
The units being acquired have sizeable land assets of close to 5,479 hectares and limestone reserves of close to 500 million tonnes in place and have the capacity to double its capacity in the future.
Birla said the asset will be value accretive after three years of operations. At present the Gujarat assets include a 3.6 mtpa of clinker unit, a 2.4 mtpa of cement unit and a grinding unit of 2.4 mtpa in Ahmedabad.
The asset also has a captive thermal plant (CPP) of 57.5 MW and a DG unit of 30 MW and jetty of 2500 DWT barges for coal and clinker movement.
At present the cement unit is running at a capacity utilisation of 60-62 per cent which UltraTech plans to raise to 85 per cent in the coming years. A senior official said that as of now the capacity utilisation of the Jaypee units is lower than its peers and once it is taken over the firm will look to increase it to 80 per cent in the first year itself. A few changes will also be made in the senior management of the existing units.
The transaction will take eight-nine months for its closing.
(Edited by Joby Puthuparampil Johnson)