Mumbai: Nirma Ltd has agreed to buy Lafarge India’s cement assets from LafargeHolcim at an enterprise value of $1.4 billion (around 9,400 crore), in what could be the largest deal financed by bonds in India.

The company, best known for its success in the detergent business in the 1970s and 1980s—it was a formidable competitor to Hindustan Unilever Ltd—plans to raise about 4,000 crore from the domestic corporate bond market to part-finance its purchase, said three bankers familiar with the matter.

One of the three said another 4,000 crore would be raised through loans. None of the bankers wanted to be identified.

Bonds issued to raise money to buy a company are usually backed by cash flows expected from the assets being acquired. Such acquisitions are called leveraged buyouts, or LBOs.

Barclays Plc., Credit Suisse and IDFC Ltd are advising Nirma, which said in a statement that it would “fund the acquisition through equal proportion of equity and target level financing".

The seller

LafargeHolcim said in a statement on Monday that it has entered into an “agreement with Nirma Limited subject to approval by the Competition Commission of India (CCI) for the divestment of its interest in Lafarge India for an enterprise value of approximately $1.4 billion".

Arpwood Capital and Citibank advised LafargeHolcim on the transaction.

At $1.4 billion, the deal will be close to LafargeHolcim’s initial price expectation. A third person directly involved in the earlier rounds of deal talks, and who spoke on condition of anonymity, said LafargeHolcim expected 10,000 crore from the asset sale.

Lafarge operates three cement plants and two grinding stations with a total capacity of around 11 million tonnes per annum (mtpa). In its statement, the company said LafargeHolcim will continue to operate in India through its subsidiaries ACC Ltd and Ambuja Cements Ltd with a combined cement capacity of more than 60mtpa.

In April 2015, LafargeHolcim was directed to sell 5.15 mt of its east India assets in order to comply with competition rules in India. This was a prerequisite for the global merger of Holcim and Lafarge to be consummated in India. In August 2015, the company agreed to sell its east India cement assets to Birla Corp. Ltd for 5,000 crore. However, the deal was called off in February due to regulatory hurdles over the transfer of mining rights with these assets. Such a transfer was not permitted at the time under the provisions of the Mines and Minerals (Development and Regulation) Act. The Act has since been amended to allow such transfers.

LafargeHolcim restarted the process to sell its entire 100% stake in Lafarge India even before the amendment. The sale attracted the interest of several potential buyers, given the size of the assets on offer. JSW Cement Ltd, Piramal Group, a few foreign cement companies and some private equity funds expressed interest.

The buyer

So did eventual buyer Nirma, promoted by the Ahmedabad-based Karsanbhai Patel. The group has about 18,000 employees, with an annual turnover of more than 7,000 crore, according to the company’s website.

“Nirma already has 2mtpa cement capacity in Rajasthan and is putting up a new plant in Gujarat. It was very keen to buy this asset," said a person familiar with the transaction.

The purchase of LafargeHolcim’s cement assets will help Nirma become a prominent cement producer. With 13.28mtpa of capacity, the company will figure among the top 10 cement producers in the country.

“This acquisition is a landmark and transformational step for the group’s cement business. With a strong platform like Lafarge’s India business, we plan to take the cement business to the next level," said Hiren Patel, managing director, Nirma, in a statement.

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“Nirma is a cash-rich company and has an Ebitda (earnings before interest, tax, depreciation and amortization) of nearly 1,400 crore. Once the CCI approval comes, the payout will happen," added the person, speaking on condition of anonymity.

According to a 29 June note from credit rater Crisil, Nirma’s consolidated adjusted net worth as of 31 March was 3,900 crore and its adjusted debt 1,340 crore, resulting in a gearing ratio (the ratio shows the extent to which a company’s operations are funded by debt) of around 0.34.

A second person familiar with Nirma group’s strategy said Nirma “is trying to become a commodity conglomerate. In recent years it has acquired a large-sized soda ash company in the US and is very keen to expand in the cement space". This person spoke on condition of anonymity.

An analyst said Nirma might find its acquisition difficult to digest.

“It has struggled with its own plants, so handling 11 million tonnes will be a challenge. The valuation is bit expensive in the current environment where the east India market is facing a oversupply situation, with fresh capacities coming in. Nirma is buying a good asset, but in a competitive market," said an independent cement analyst who did not want to be identified.

According to the Crisil note, the company has invested about 1,300 crore in its 2.28mtpa cement plant in Rajasthan. Crisil pointed out that Nirma’s entry into the cement sector will expose the company to the cyclical nature of the business and risks associated with early-stage operations.

In the last financial year, said the Crisil note, Nirma reported a consolidated net profit of 760 crore against 390 crore in 2014-15.

The acquisition will change Nirma’s revenue mix. According to the Crisil note, over the past few years, Nirma’s revenue mix has changed significantly towards soda ash and linear alkyl benzene, which accounted for around 60% of total revenue in 2014-15, against 46% in 2008-09.

In its June note, the credit rater warned against any massive capacity expenditure or acquisition.

“The outlook may be revised to ‘Negative’ if Nirma undertakes a large debt-funded capex programme or acquisition that considerably weakens Nirma’s financial risk profile, or if exposure in the form of guarantees/advances increase significantly, or its profitability is constrained by intensifying competition in the soaps and detergent segment."

Not everyone is as negative, though.

Nitin Bhasin, head of research at Ambit Capital Pvt. Ltd, sees it as a good deal for Nirma. “The valuation is attractive when compared to the market valuation of some of the cement companies operating in weaker cement markets and similar effective capacities. If the price includes the brand, it’s even better for Nirma, which is a new entrant in east India. In the long term, 9,400 crore is a very good deal. For a company like Nirma, which has experience dealing with the branded-commodity business, handling the cement business will not be difficult."

The deal, once complete, will be the second largest cement transaction this year.

On 4 July, in a revised deal, Jaiprakash Associates Ltd agreed to sell 21.2mtpa of cement assets to UltraTech Cement Ltd for 16,189 crore, along with an additional 470 crore for its under-construction grinding units.

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