No sooner did the Lafarge acquisition run aground than cement maker Birla Corp. Ltd steered the course in a new direction.
On Friday, it announced plans to acquire the entire cement business of Reliance Infrastructure Ltd, valued at Rs.4,800 crore.
First, a look at the positives. Currently, Birla Corp.’s 9.5 million tonnes per annum (mtpa) capacity is spread across Rajasthan, Madhya Pradesh, Uttar Pradesh and West Bengal.
The acquisition will add 5.8 mtpa to its capacity and strengthen its presence in central India, where demand is robust.
It would bite off a 16% share in that region after the acquisition, making it the third largest in the central region. The deal also brings access to limestone and coal reserves, and optimal use of resources and manpower.
Also, the acquired business enjoys among the best terms on exemption of value-added tax. Besides, analysts say, the valuation of about $130-140 per tonne is reasonable, considering that Birla Corp.’s capacity would be enhanced by a huge 50% and that Reliance Infra’s plants are new, compared with Lafarge’s.
But then, there are negatives in the deal, too. Birla Corp. would have to raise incremental debt to fund the acquisition, as the firm’s cash and liquid investment is about one-fourth of what is needed.
This may pull down profitability in the near term, although the firm is not precariously leveraged.
That is perhaps why the Street has not been euphoric.
Another reason for the subdued sentiment on the Street could be that the Birla Corp-Lafarge deal fell through on regulatory grounds, making investors wary about mergers and acquisitions in the sector.
Such hurdles may be unlikely as the deal is through the sale of shares (equity) and not assets.
Analysts say that the Reliance deal is not as remunerative as the Lafarge one, which would have been better for regional diversification, profitability and brand equity.
Indeed, the acquisition will take time to pan out into higher profitability for Birla Corp.
In the near term, with the subdued offtake of cement and, therefore, low utilization, the deal may dilute earnings and return ratios. But it is certainly more economical than organic growth.
In stark contrast, shares of Reliance Infra shot up by 7% to Rs.437.5 apiece.
What’s good for the company is that, besides now being able to focus on its core business of infrastructure, the debt in the cement subsidiary will be transferred to the acquirer and Reliance Infra’s highly leveraged balance sheet will get some relief.