Bangalore: Hyderabad-based Rain Commodities Ltd has bought Belgian chemicals maker Rutgers NV from investment firm Triton Partners for €702 million (around Rs.4,920 crore) in the biggest acquisition by an Indian company this year, and also the largest acquisition by the company since its 2007 purchase of US company CII Carbon Llc for $595 million in an all-cash deal.
Analysts sounded a warning about Rain’s acquisition, effected through subsidiary Rain CII Carbon Llc, that may well mark a revival in deal-making in India.
L&T Finance Holdings Ltd’s Rs.120 crore acquisition of automobile financier FamilyCredit Ltd and Dr Reddy’s Laboratories Ltd’s €27.4 million offer for the Netherlands-based OctoPlus NV. To be sure, there’s still a lot of catching up to do. According to researcher VCCircle, between 1 September and 22 October this year, 82 acquisitions totalling a little over $3 billion and 62 private equity (PE) deals worth $637 million were announced. The corresponding numbers for the same period in 2011: 126 acquisitions totalling almost $4 billion and 76 PR deals worth $2.7 billion.
Indeed, even if there is a revival, deals will be smaller, said an expert.
“We will see a lot of small ticket (Rs.100-150 crore) acquisitions in manufacturing and technology segments,” said Harish H.V., partner, India leadership team, at Grant Thornton. According to him, there is substantial interest by Indian firms in overseas assets. “With softened valuations, it is a good time for cash-rich companies to enter markets they have been looking at.”
Rain Commodities expects to close the deal to buy the Belgian coal tar pitch maker in early 2013 and fund it partly through its own funds and partly by raising debt—it will sell long-term bonds to raise $695 million (€533 million or Rs.3,735 crore). Rutgers ended 2011 with revenue of €831 million.
Rain Commodities believes the acquisition is a perfect fit. “With this acquisition, we have become a one-stop-shop for supply of coal tar pitch and calcined petroleum coke. We (referring to both companies) have a lot of common customers,” said Srinivasa Rao, chief financial officer at Rain Commodities. He declined to provide further details citing confidentiality concerns.
Both coal tar pitch and calcined petroleum coke are used in the manufacture of aluminium. The latter is also used in the steel business.
“Rutgers and Rain CII have complementary products and geographic presences,” Rutgers chief executive Henri Steinmetz said in a statement. Rain CII operates calcining plants in India, the US and China along with three deepwater shipping terminals.
An analyst said Rain will have to get used to operating in a business that is reasonably new to it. “The margins in coal tar pitch business could be around 10-12%, while in calcined petroleum coke it is 20-25%,” said this person, who works for a Mumbai-based brokerage and asked not to be identified.
Shares of Rain Commodities closed at Rs.41.25, down 4.51%, on the BSE, on a day when the exchange’s benchmark Sensex rose 0.6%.
Rain Commodities reported revenue of Rs.5,620 crore and a net profit of Rs.664 crore in 2011. It had a debt of Rs.3,778.71 crore as on 31 December.
Until mid- 2007, Rain Commodities was a mid-sized company primarily in the cement business. The acquisition of US-based calcined coke producer CII Carbon changed its fortunes. That acquisition was leveraged 14 times, raising doubts in minds of analysts on whether the company could digest the deal. Rain raised a long-term loan of $535 million and rustled up $60 million as equity. The acquisition was a runway success and the company’s debt-equity ratio is less than 1 now.
Purely in financial terms, “Rain Commodities is in a much better situation than what it was five years ago with healthy margins and cash flows to support an acquisition of this size”, the analyst said.