UltraTech Cement, an Aditya Birla Group Company, has acquired the 4.8-million tonne per annum (mtpa) Gujarat unit of Jaypee Cement Corporation, for Rs 3,800 crore. As part of the deal, UltraTech will take over debt of Rs 3,650 crore. It will issue equity worth Rs 150 crore, with the fresh issue resulting in dilution of no more than 0.32 per cent of its capital. The Gujarat unit of Jaypee Cement has a 57-MW coal-based power plant with a 30-MW DG (diesel generator) back-up, limestone reserves sufficient to run the plant at current capacity for 90 years and a captive jetty at Sewagram. The valuation of the plant works out to $124 a tonne with the rupee valued at 64 against the dollar.

For Jaypee Associates, this may be only the first of the moves to prune the Rs 60,000-crore debt it carried on its books.The acquisition will raise UltraTech’s capacity to 59 million tonne. With new expansion plans in Karnataka, Rajasthan and Madhya Pradesh set to go on stream by 2015, UltraTech’s capacity is expected to touch 70 mtpa. UltraTech will also benefit from the Rs 350-380 crore unrealised depreciation and tax set-off against the losses incurred by Jaypee Cement. Of the total debt of Rs 3,650 crore, UltraTech plans to finance Rs 1,650 crore through internal accruals and renegotiate a lower rate for the remaining debt of Rs 2,000 crore.

Acquisition of the Gujarat Cement Unit of Jaypee by UltraTech is really a value accretive deal for UltraTech

UltraTech has already identified savings of Rs 40 crore through operational synergy with its existing plant in Saurashtra and the acquired plant in Kutch, increasing capacity utilisation of the Kutch unit and entering new markets. On why the 5-mtpa Andhra Pradesh plant of Jaypee was left out of the deal, Birla said currently the cement supply in the southern market was much higher than demand. This apart, he said, UltraTech recently commissioned a 4.8-mtpa capacity in Tadapatri.

Jaypee Group – brief background:

The Jaypee Group, having interests in areas such as real estate, cement and hospitality, is the country’s third largest cement maker after Aditya Birla Group and Holcim Group with an installed capacity of 33.5 mtpa. The Group is working on increasing its cement capacity to 36 mtpa by the end of the current financial year and is evaluating various locations to take it to 50 mtpa capacity over the next five years.

Jaiprakash Associates Limited (“JAL”) is the flagship company of the Jaypee Group through which the cement business of the Group is being carried out. In 2011, the cement operations of JAL in the state of Gujarat and Andhra Pradesh along with certain other assets were hived off to Jaypee Cement Corporation Limited (“JCCL”), a wholly owned subsidiary of JAL for a total cash consideration of around Rs 4,031 crore. Consequently, the cement units at Gujarat and Andhra Pradesh having a capacity of around 4.8 mtpa and 5 mtpa respectively are currently under the aegis of JCCL.

Jaypee Group, which is sitting on a mountain of debt i.e. over Rs. 55,000 crores (including around Rs. 23,000 crores of JAL) is targeting to reduce its debt by around Rs 15,000 crore this fiscal.

UltraTech – brief background:

Aditya Birla Group, the country’s largest cement maker with 54 mtpa capacity (51 mtpa in India & 3 mtpa overseas) runs its cement business through Ultratech Cement Ltd. (“UltraTech”) and plans to increase its capacity by another 10 mtpa by 2015 driven by its ongoing expansions in Chhattisgarh, Karnataka and Rajasthan.

Transaction:

UltraTech proposed to acquire the cement operations of JCCL at Gujarat at an enterprise value of Rs 3,800 crore (subject to working capital adjustments at closing).

 The acquisition is proposed to be carried out by way of a demerger through a Scheme of Arrangement pursuant to Sections 391-394 of the Companies Act, 1956. All the assets and liabilities of JCCL (including the debt and other liabilities of JCCL of approx Rs 3650 crore) relating to the cement operations at Gujarat would be transferred to UltraTech. The consideration for demerger would be equal to Enterprise Value less liabilities taken over and such consideration would be discharged by UltraTech by way of issue of its equity shares to the shareholders of JCCL i.e. JAL, as required by the tax law. In this regard note that:

  • Current estimate of consideration is approx Rs.147 crore;
  • Consideration to be adjusted at Closing for movements in working capital, liabilities, assets and the share price of UltraTech;
  • Consideration capped at Rs.150 crore – Maximum dilution as per agreed formula at current prices ~ 0.32%.

The Gujarat operation of JCCL that will be transferred to UltraTech mainly comprises of an Integrated Cement Unit at Sewagram, Kutch, Gujarat with Clinker Capacity of 3.6 mtpa and cement capacity of 2.4 mtpa and Cement Grinding Unit at Wanakbori (Near Ahmedabad), Gujarat with cement capacity of 2.4 mtpa. The combined capacity of both the divisions of the Gujarat unit is 4.8 mtpa including land area of 5479 Ha, a 57.5 MW coal-based thermal power plant, limestone reserves of around 500 MnT – sufficient for over 90 years at current capacity, a captive jetty at Sewagram – 2500 DWT barges for clinker and coal movement and desalination plant – meeting water requirement.

The proposed transaction is subject to the approval of shareholders and creditors, sanction of the Scheme of Arrangement by the High Courts, approval of the Competition Commission of India and all other statutory approvals and hence as per both the parties the transaction is expected to close in 8-9 months.

Financing:

The acquisition is proposed to be funded through equity of Rs 150 crore, debt worth Rs 2,000 crore and the remainder of Rs 1,650 crore through internal accruals.

UltraTech is likely to negotiate with JCCL’s lenders to restructure the existing debt on the latter’s books. If the talks fail, UltraTech may refinance the debt.

Impact of the deal on UltraTech:

  • With this acquisition of 4.8 mtpa capacity, installed capacity of UltraTech will increase to 59 mtpa, which would further strengthen the market leadership of UltraTech in Indian cement sector.
  • The acquisition would meet the need of UltraTech to enhance capacity in Gujarat:
  • Cement market in Gujarat grew at 11.7 per cent in the last seven years; also Gujarat is strategically well located from the point of view of exports;
  • Existing plant of UltraTech in Saurashtra, Gujarat is presently operating at 95% capacity and they need optimal volumes to feed into Mumbai, Kochi and Sri Lanka where they have grinding units. UltraTech required additional volume to serve local, coastal & export markets.
  • UltraTech lost volume in Gujarat post disposal of Shree Digvijay Cement Co. Ltd.;
  • UltraTech had build capacities in all zones, except Gujarat region;
  •  Access to a jetty would also enable UltraTech to ship cement to new markets
  • UltraTech proposes to increase the capacity utilisation at the JCCL plants from 62% to 85% in the coming years. With this along with other measures such as increase in operational efficiency, increase in the proportion of blended cement from current 15%, increase in trade sales from current 35% and with conversion of Jaypee brand into the UltraTech brand, UltraTech anticipate to increase the operational performance of acquired unit.
  • UltraTech is expecting synergy gain of approx Rs 30-40 core a year from this deal on account of manufacturing, marketing and supply chain synergies. UltraTech has an existing plant in Saurashtra, Gujarat and now with the acquired assets of JCCL in Kutch, synergistic benefits will increase on increased coastal and clinker movement.
  • The grinding units of JCCL will help UltraTech cut its logistics expenses due to proximity to key markets.
  • With around 5479 hectares of land and 500MT of mining reserves, there is a potential for UltraTech to double the capacity at the acquired cement unit in the near future. In view of this, UltraTech believe that the transaction will be value accretive in the next three years.
  • Acquisition comprised of the high quality recently commissioned cement plant with latest technology with immediate cash generation potential.
  • UltraTech will also benefit from the tax perspective on account of carried forward business losses and unabsorbed depreciation of the acquired unit of approx Rs 350 crore.

Impact of the deal on Jaypee Group:

  • After the transaction, the Jaypee Group’s cement capacity will come down to 33 mtpa and it will continue to be the third-largest cement manufacturer in the country after Aditya Birla Group and Holcim Group.
  • The deal will help Jaypee Group pare its mounting debt of Rs 55,000 crore by around Rs 3650 crore.

Valuation:

It is understood that acquisition has been valued on the basis of replacement cost, with additional strategic assets. The transaction implies a valuation of $124 per tonne of cement, which is lower than the existing benchmark of around $140-145 per tonne, and is a positive for UltraTech, according to industry estimates. The valuation is comparable to the $133 per tonne that Ambuja Cements is estimated to be paying for a stake in ACC’s units.

Conclusion:

The deal appears to be value accretive for UltraTech, provided it is able to generate additional volumes and create synergies between its existing plant in Gujarat and the acquired plant as anticipated in the near future. Though the valuation is bit on a lower side, it was extremely important for Japyee Group to reduce its mounting debts and hence we believe that the step taken by Jaypee Group is right from their point of view. However, there is still a big challenge before Jaypee Group to sell its 5 mtpa cement unit at Andhra Pradesh which is currently operating way below its capacity, given the overcapacity in the south. As we stated in our last month edition, the Indian Cement Industry is in a consolidation phase and is going to see a lot of deals happening in the not too distant future.

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