UltraTech to buy bulk of Jaypee Cement for $2.4B

UltraTech Cement Ltd has struck a mega deal to acquire almost the entire cement business of Jaiprakash Associates Ltd at an enterprise value of Rs 16,500 crore ($2.4 billion), the Aditya Birla group firm said on Sunday.

The deal will help UltraTech, the single-largest cement firm in the country in terms of capacity, to again overtake its Swiss construction materials rival LafargeHolcim, which controls Ambuja Cements, ACC and Lafarge India in the country.

The deal involves acquisition of plants with capacity to produce 22.4 million tonnes per annum (mtpa) spread across six states--Madhya Pradesh, Himachal Pradesh, Andhra Pradesh, Karnataka, Uttarakhand and Uttar Pradesh. This includes a 4 mtpa plant under construction.

Jaiprakash Associates' cement is sold under the Jaypee Cement brand. Jaypee Group, which controls diversified firm Jaiprakash Associates, had cement capacity of 27.79 mtpa as of March 31, 2015, with close to 4 mtpa under implementation. 

UltraTech didn’t specify which plants it is buying, but it is likely to exclude Bela and Sidhi plants in Madhya Pradesh that it had previously sought to acquire. These two plants have cement grinding capacity of 4.9 mtpa besides clinker capacity of 5.2 mtpa and 180 MW of captive power. 

UltraTech had,  in December 2014, inked a deal to buy these two units at an enterprise value of Rs 5,400 crore ($853 million then). However, it couldn’t get approval for the mining rights associated with the plants, which were crucial for the deal to go through. As a result this deal was scrapped, the two companies said on Friday.

The latest deal is the second-biggest domestic M&A transaction ever in local currency terms behind Sun Pharmaceutical's acquisition of Ranbaxy, which was completed a year ago.

In dollar terms, however, it is smaller than Kotak Mahindra Bank's acquisition of ING Vysya Bank and HDFC Bank's acquisition of Centurion Bank of Punjab almost a decade ago, as per VCCEdge, the data-research platform of VCCircle.

What it means for UltraTech

UltraTech said the deal would augment its business at Satna in Madhya Pradesh, Uttar Pradesh (East), Himachal Pradesh and coastal Andhra Pradesh, where it didn’t have a strong presence.

The deal would take its cement capacity to 90.7 mtpa from 68.3 mtpa, overtaking LafargeHolcim's 74 mtpa combined capacity. LafargeHolcim, which merged globally to create a cement behemoth, had earlier overtaken UltraTech as the top domestic cement producer thanks to Lafarge India's 11 mtpa capacity in the country.

But Lafarge India needs to divest at least half of its existing operations in India to comply with conditional anti-trust approval granted for the Indian leg of the merger. It had decided to sell this to Birla Corp (separate from AV Birla Group that controls UltraTech). However, this transaction came unstuck.

It would be closely watched if UltraTech gets a neat hit to buy majority of Jaypee Cement given its impact on competition, significantly stretching its lead over LafargeHolcim. Jaypee Cement is the third-largest cement producer in the country as a group.

UltraTech had earlier also acquired two units of Jaypee Cement with 4.8 mtpa capacity located in Gujarat at an enterprise valuation of Rs 3,812 crore ($590 million).

That deal was inked at Rs 7,942/tonne as against the latest deal at Rs 7,366/tonne ($108). But in the latest deal almost a fifth of the capacity is under construction.

What it means for Jaiprakash

Jaiprakash Associates has been looking to pare assets as part of a strategy of the debt-laden firm to deleverage the balance sheet.

Besides its deals with UltraTech, it has sold a cement grinding unit with capacity of 1.5 mtpa located at Panipat in Haryana to Shree Cement Ltd. It has also sold its entire 74 per cent holding in Bokaro Jaypee Cement Ltd, its joint venture with Steel Authority of India Ltd, to Dalmia Cement (Bharat).

Jaypee Group has been selling other assets, too. Last September, JSW Energy completed the acquisition of two hydroelectric projects in Himachal Pradesh from Jaiprakash Power Ventures Ltd at an enterprise value of Rs 9,275 crore ($1.4 billion then) with additional milestone-linked payments of up to Rs 300 crore by 2020.

This deal was struck in 2014, and remains to date the biggest ever in the Indian infrastructure sector. It not only allowed JSW Energy to enter the hydropower sector but also at one shot made it the top player in terms of operational assets in the segment.

A huge debt pile has ensured that Jaiprakash Associates trades as a penny stock. As of Friday, it had a market value of just Rs 1,637 crore ($238 million).

If it manages to sell the cement assets as per plan, it would be able to prune its debt. The firm had total debt of Rs 32,304 crore as of March 31, 2015, including Rs 580 crore of interest payments due but not paid and Rs 536 crore of interest accrued but not due, as per its annual report for the year.

Cement consolidation

The cement industry has been going through a string of small and mid-sized M&As as the industry went through a period of slowdown. Pending infrastructure projects and poor state of real estate has affected demand over the past few years.

While several sellers were forced to divest assets due to stretched balance sheets, some also decided to opt out of the business due to strategic reasons.

For instance, Reliance Infrastructure had put its cement business and its road assets on the block, as it is now focusing on defence manufacturing. Earlier this month, it agreed to sell its cement unit to Birla Corp for Rs 4,800 crore ($710 million).

Reliance Cement has total capacity of 5.08 million tonnes at Maihar, Madhya Pradesh, and Kundanganj, Uttar Pradesh. It also has a grinding unit of half a million tonnes capacity at Butibori, Maharashtra. The deal was struck at $140 a tonne, higher than what UltraTech is paying for Jaypee Cement.

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