Mumbai: India’s top refiner Shree Renuka Sugars struck a fresh deal to buy Brazil’s Equipav at a lower price, helping it secure key raw material cheaply and giving it access to the world’s largest sugar producer.
The firm will now pay about a quarter less to acquire a majority stake in Equipav SA Acucar e Alcool at $250 million as sugar prices nearly halved, on better output estimates, since the firm first announced the deal in February.
Sugar prices globally have corrected by over 40 percent from their 2010 peaks, and analysts say they are unlikely to test highs as supplies will improve further in 2010/11.
“Despite the slump in sugar prices, it is a pretty decent deal as they were able to renegotiate,” said Varun Guntupalli, analyst at Edelweiss Securities, who has a ‘buy´ on the stock.
“This is a long-term thing to be viewed for the company in terms of securing raw sugar for their port-based refinery in India.”
Guntupalli, expects Equipav to be accretive on Shree Renuka’s bottomline from the financial year-ending September 2011 but awaits more clarity.
Gautam Watve, who heads Shree Renuka’s strategy and planning, told Reuters it would take about a couple of weeks to disclose Equipav financial details.
He expects a “a big jump” in operating profit in FY10 but profit after tax will turn accretive only from FY11, he said over the telephone. Sugar firms in India follow October-September year for financial accounting.
Right deal at right time?
Shree Renuka Sugars, which is currently valued by the market at $1.01 billion, had earlier said it will buy Equipav at $329 million, which analysts had viewed as an expensive buy.
Shree Renuka shares have lost about a quarter of their since it announced Equipav deal on 21 February, signalling the stock market did not view the deal as positive, while a slump in sugar prices added to the pressure.
The new terms value Equipav, which owns two large sugar mills, at $1.15 billion, Shree Renuka said in a statement to the stock exchanges.
Equipav had $822 million of debt as of December 2009, Shree Renuka had said in February. It has now renegotiated the debt with bankers and will repay it in 10 years instead of 8 years as was agreed earlier, Watve said.
“This is a very comfortable deal for us as...the loans are restructured, we don’t have any major repayment for three years, so we have enough time to turn around the company and wait for the up cycle,” managing director Narendra Murkumbi said.
The company expects to inject the proceeds from the deal to partly repay debt, working capital and on capital expenditure.
From local to global
Shree Renuka was founded by Narendra Murkumbi and mother Vidya Murkumbi in 1998 with facilities in India’s southern state of Karnataka. With a string of local acquisitions and two in Brazil, the firm has become a leading sugar supplier in India.
This is Shree Renuka Sugars’ second major acquisition after it closed a deal to buy sugar and ethanol producer Vale Do Ivai S.A. Acucar E Alcool for $82 million in March 2010.
“We have doubled the size of our company in terms of scale of operations,” Murkumbi said.
“At least for the next year and year and a half we want to consolidate what we have acquired in the last 12 months.”
At 2.24 pm, shares in the firm were down 0.36% to Rs68.50 in a Mumbai market that was down 0.11%.