Mumbai: The Aditya Birla Group on Tuesday moved one step closer to consolidate its cement business with the UltraTech Cements Ltd board giving an in-principle approval to merge Samruddhi Cements Ltd with itself.
Clearing the air: Kumar Mangalam Birla says once investors fully absorb the implication of the deal, the reaction will be positive. Abhijit Bhatlekar / Mint
The board also appointed Bansi Mehta and Co. and UBS India to value the two firms and arrive at a swap ratio of shares for the merger that will create India’s largest cement company with 49 million tonnes capacity, controlling 21% of the market. The merged entity will be the world’s 10th largest cement maker. The reports will be submitted by the first week of November.
The merger aims to address investor confusion on which of the two group companies was the group’s vehicle for growth, Aditya Birla Group chairman Kumar Mangalam Birla said, addressing the media for the first time after the proposal was made public.
Explaining the rationale behind the merger proposal, Birla said the investors can now own shares in a pure cement company; UltraTech can grow twice as fast after the merger than in the current structure as a subsidiary of Grasim Industries Ltd.
Last week, Grasim Industries said it would hive off its cement business to Samruddhi Cements, an investment company of the group with interest in telecom, aluminium, financial services and retail.
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After the merger, shareholders of Grasim will own shares in a pure cement company UltraTech as well as in the parent which makes viscose staple fibre, an alternative to cotton used to make garments.
The merger will rerate UltraTech, said Saurabh Misra, UltraTech’s managing director. The Birlas were evidently concerned about the valuations that their two cement companies commanded in the market. Its main rival Swiss cement giant Holcim’s ACC Ltd’s enterprise value is pegged at $147 a tonne of cement making capacity and even a regional player such as Shree Cement Ltd commanded an enterprise value of $160 a tonne of cement making capacity. In contrast, UltraTech’s valuations were $110 a tonne.
Grasim shares lost 7.1% on Monday, the first trading day after the merger announcement, but rose marginally (0.11%) to close at Rs2,511.95 on Tuesday.
Birla also tried to allay investor fears. “I don’t think Grasim will be marginalized,” Birla said, “Keeping that strong parentage has been a strong consideration,” he emphasized.
Grasim Industries will always be an operating company with cement and VSF assets, Birla added. Once investors fully absorb the implication of the deal, the reaction will be positive, Birla said.
Grasim Industries has no plans to invest in a third business other than cement and VSF, he reiterated.
D. Muthukumaran, head-group corporate finance, in an interaction with Mint last week alluded to Grasim investors’ preference for a “pure play cement company” as one of the reasons for the restructuring. “Everyone wants a cement company as a pure play company. Otherwise, we could have considered merging UltraTech into Grasim,” he said. “This creates a choice and the structure creates a flexibility.”
The merged outfit with a debt/equity ratio of 0.7, will have enough headroom to borrow funds to grow faster both in cement and VSF, Muthukumaran said.
The new shareholding structure will also ensure that Grasim retains its grip on UltraTech, as it will control about 60% of the merged entity. The promoters led by Birla control a little less than 26% equity stake in Grasim, but Grasim controls 55% in UltraTech.
The group is betting on building huge capacities in cement. While Grasim has increased capacity five times in 12 years, its acquisition of UltraTech has meant that the combined production capacities have increased nine times in 12 years. The company used the excess cash generated from VSF to fund its cement operations.
“VSF generated more cash than it could generate,” Muthukumaran said. “This (cement) is such a strong business that even now it can absorb capital,” he added.
UltraTech has completed a 15 million tonnes expansion in last four years and will invest $3 billion to make an additional 25 million tonnes in next five years, said Birla.
The merged company will have better discounting in the market when the fundamentals of the cement industry are deteriorating, said a cement analyst of a Mumbai-based brokerage. Cement prices are falling and next year could see further pressure on margins with additional cement capacities commissioned, the analyst said under condition of anonymity as he is not authorized to speak to the media.
“The winner in a cyclical cement industry is the one who does not follow the crowd and invests across the cycles,” says Promeet Ghosh, managing director, DSP Merrill Lynch, one of the advisers to the transaction.
“The Grasim balance sheet is sufficient to fund the capex but the new transaction gives the company financial flexibility to grow faster,” Ghosh, who has been tracking the sector for past 17 years, said.
The Aditya Birla Group also needs to move fast as multinational companies such as Holcim Ltd (that owns ACC Ltd) and Ambuja Cements Ltd have a large market share. “Our Indian group companies significantly increased their cement sales in all regions of the country,” Holcim said in a presentation on its website released soon after its half yearly results. Holcim’s strong footprint in the emerging markets partially offsets the negative operating cash profit developed in the mature markets, the company said.
“Based on my research on emerging market business groups, the path that Aditya Birla Group has taken is consistent with building a world class company in the era of globalization of emerging markets,” said Krishna G. Palepu, Ross Graham Walker professor of business administration and senior associate dean for international development at Harvard Business School, in an email interview with Mint. He interpreted the move into new sectors as reasonable for a leading Indian company, given the new opportunities that liberalization of India has created.
The fears expressed by a few analysts that excess cement capacity is being built in India is dismissed by Grasim. “We know the market in the long term is very good. Three years from now we’ll need a lot of cement in this country. What happens in the next two years, who cares,” said Muthukumaran.
Vinod Juneja, managing director of Binani Cements Ltd, admitted that there is pressure on margins “but one has to be reasonable”. Juneja wants to increase capacity to 12-15 million tonnes by 2012 from 10 million tonnes now.