Tata Chemicals Ltd announced on Monday that Brunner Mond, its wholly owned subsidiary, has acquired UK-based British Salt Ltd for £93 million (Rs 650 crore), which translates into about six times calendar year 2009 earnings before interest, tax, depreciation and amortization (Ebitda). Analysts maintain that the deal, which would be entirely financed through debt with no recourse to Tata Chemicals, seems fairly valued.
Brunner Mond produces soda ash and was purchased by Tata Chemicals in 2006. This deal would be backward integration for Brunner Mond, as salt is one of the key raw materials for making soda ash.
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Why British Salt? In 1926, Brunner Mond merged with three other British chemical companies to form Imperial Chemical Industries (ICI). However, in 1991, Brunner Mond was divested from ICI, putting it under pressure over securing raw materials. The saving grace was that Brunner Mond had a 25-year contract for raw material as part of the divestment, which is set to expire in 2016. The company maintains that Brunner Mond’s sourcing costs would have increased substantially in case of a contract renewal.
Following this deal, Brunner Mond’s debt is expected to increase to about £150 million. British Salt is expected to earn revenue worth £35 million for this calendar year and enjoys strong Ebitda margins of 50%. Even as Ebitda margins are attractive, higher interest costs are likely to be a burden on the net level performance for three-four years.
Tata Chemicals maintains that synergies between Brunner Mond and British Salt would result in an Ebitda improvement of £2 million per year. Further, after five years, cash worth £45 million from the lease of cavities for gas storage is expected. British Salt currently produces 390 kilo tonnes of vacuum salt annually and in 2009, British Salt enjoyed a 55% market share by volume in the UK evaporated salt market.
While that looks good, analysts back home are worried about Tata Chemicals’ domestic business and pressure on margins. The company delivered poor financial results for the quarter ended September. Consolidated net profit declined sharply by 43% over the same period last year to Rs 127 crore. Floods and a plant shutdown affected numbers during the quarter. Operating profit margin, which fell by four percentage points, are expected to improve in the current quarter, helped by some price increases.
After the poor September 2010 results, it’s no surprise that Tata Chemical’s stock has underperformed the BSE-100 index. Though the recent price correction makes valuations a tad attractive, investors should watch out for the impact of cost pressures in soda ash.
Graphics by Yogesh Kumar/Mint
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