Mumbai: In what could be the largest leveraged buyout (LBO) that the Indian market has seen, Gujarat-based soda ash, soap and detergent manufacturing company Nirma Ltd has signed an agreement to acquire Lafarge India Pvt. Ltd’s assets for ₹ 9,400 crore ($1.4 billion).
Promoters of Nirma plan to fund the deal by raising ₹ 4,000 crore through a bond issuance, nearly ₹ 3,400-3,500 crore through loans and about ₹ 1,900-2,000 crore through equity, said three people directly familiar with the matter. All three did not wish to be identified as they are not authorised to speak to the media regarding this transaction.
What that means is that of the ₹ 9,400 crore that Nirma needs to pay LafargeHolcim, nearly ₹ 7,500 crore will be raised through debt. In other words, nearly 80% of the total deal value will be paid through borrowed funds, making it a textbook LBO. Nirma will use the cash flows of Lafarge India to back the bond issue while also using some of its own assets as collateral to raise fresh debt.
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A leveraged buyout or LBO is a form of acquisition where one company acquires another firm and finances most of the deal with borrowed money. The borrowing is often done using the target company’s assets as collateral.
“Because it is a critical transaction and has not been done in India before, the firm has mainly hired foreign banks to execute the process. For the fund raising process, they have also mapped cost rationalization process of Lafarge’s assets and expect earnings before interest depreciation tax and amortisation (Ebitda) and cash flows to improve significantly going forward," said the second person mentioned above.
According to a 28 June report by rating agency Crisil Ltd, the financial risk profile of Nirma is healthy because of the comfortable capital structure and strong debt protection metrics. The report said, “Consolidated adjusted net worth was ₹ 3,900 crore and adjusted debt was ₹ 1,340 crore, resulting in gearing of around 0.34 time, as on 31 March 2016." Gearing is a measure of measure of a company’s financial leverage.
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Crisil expects the company’s cash accrual to be above ₹ 1,000 crore and capital expenditure (capex) to moderate in 2016-17. The outlook on the company’s rating, however, may be revised to negative if Nirma undertakes a large debt-funded capex program or acquisition that considerably weakens Nirma’s financial risk profile, said the Crisil analysts.
Nirma invested about ₹ 1,300 crore in a 2.28 million tonne per annum (mtpa) cement plant in Rajasthan, which was commissioned in November 2014, the rating paper added.
“Within India, we can’t recall any LBO of this size or kind because the asset comes without debt leverage," said the first person.
LBOs were a rage in the 1980s when promoters indulged in large-scale buyouts using this route. A classic example of this was Minnesota-based RJR Nabisco’s takeover by private equity giant Kohlberg Kravis Roberts & Co. Lp (KKR) in 1988.
Among Indian firms, the Tata group has used this route. In 2000, Tata Tea Ltd became one of the first Indian firms to undertake an LBO while acquiring Tetley in the United Kingdom.