F1 Builder Said Close to Selling Unit to Birla

Billionaire Kumar Mangalam Birla is close to buying a cement unit for 37 billion rupees ($547 million) from the company that built India’s only Formula One track, two people with knowledge of the matter said.

Birla’s UltraTech Cement Ltd. (UTCEM), India’s biggest maker of the construction material, may announce the deal to acquire Jaiprakash Associates Ltd. (JPA)’s Gujarat unit as early as next week, one of the people said, asking not to be identified because the process is confidential. Completing the transaction may take about six months, the person said.

The sale may help Jaiprakash reduce part of its $10 billion debt and boost UltraTech capacity by about 9 percent. The proposed purchase will allow UltraTech to boost market share as rivals including Holcim Ltd. expand in Asia’s third-largest economy. The price for the Gujarat plant per ton of capacity is 20 percent cheaper than Holcim’s offer to combine its Indian units, according to Sanjeev Kumar Singh, an analyst at Centrum Broking Pvt., and IDBI Capital Market Services Ltd.

“From a long term perspective UltraTech will benefit from the expanded capacity at an attractive cost,” said Mumbai-based Kumar. “Any new cement project in India will today require at least three to four years because of the stricter norms and delays in land acquisition for a project. The returns for UltraTech should be fairly good.”

Valuations Fall

UltraTech fell 5.6 percent to 1,463.70 rupees, while Jaiprakash rose 3.9 percent to 33.75 rupees at close of trade in Mumbai. India’s benchmark S&P BSE Sensex index gained 0.2 percent. Prices on Jaiprakash’s 5.75 percent dollar-denominated convertible debt fell 12 cents to $72.88, yielding 14.98 percent, according to Standard Chartered Plc prices.

Askari H Zaidi, a spokesman for Jaiprakash, and Pragnya Ram a spokeswoman of the Birla group, declined to comment.

The companies have been in discussions for more than a year, according to people with knowledge of the matter. UltraTech had offered about 43 billion rupees for the Gujarat unit, two people familiar with the process said in November. The valuation has since fallen because of concerns about production at one of Jaiprakash’s mines, the people said.

Jaiprakash’s parent, the Jaypee Group, is seeking to reduce debt by 150 billion rupees by selling its cement plants in southern and western India, some of its power generation units and property, Suren Jain, managing director at Jaiprakash Power Ventures Ltd. (JPVL), said in an interview this month.

Inaugural Race

“The money from the sale will help Jaiprakash in lowering debt, though it may not be enough,” said Ajit Motwani, an analyst at Emkay Global Financial Services.

The company is selling assets to cut costs and reverse a two-year decline in profit, as a cash crunch prompts Indian lenders to raise interest rates for the first time since 2011. The group’s liabilities increased fivefold in five years as it expanded the groups power, sports and construction businesses.

The company has also developed a 5.13-kilometer (3.19-mile) Formula One track called the Buddh International Race Circuit, built on the outskirts of India’s capital, New Delhi. The inaugural race was held in 2011.

Jaiprakash started talks with Birlas after it terminated negotiations with CRH Plc (CRH), the world’s second-largest maker of construction materials. CRH on Oct. 9 said it terminated talks with Jaiprakash to buy the operations, which include a 4.8 million metric ton grinding facility and a clinker plant.

The cement unit of the group is the country’s third largest, according to a company presentation. The group plans to sell about 30 percent of its cement capacity of 35 million tons, Jain said without elaborating.

UltraTech has an installed capacity of 54 million tons a year, according to the company’s website. It plans to increase capacity by 10 million tons in the next 20 months to 64.45 million tons, Birla said on July 29.

Demand Forecast

That will add to cement supply, which exceeds demand in India. Credit Analysis & Research Ltd. forecasts the gap will only narrow by 2016.

“For us, consolidation has been the name of the game,” Birla said on Aug. 30, 2012 at the company’s annual general meeting. “We, as the last man standing, have the best chance of being the first man forward - to consolidate market positions, to show superior performance and get an edge over competition.”

Birla, who also controls the world’s largest rolled aluminum maker, is targeting a 63 percent increase in revenue for the group to $65 billion by 2016.

The proposed purchase price values capacity at Jaiprakash’s Gujarat unit at $133 a ton, according to Centrum’s Singh. That compares with $166 a ton that Holcim’s Ambuja Cement Ltd. (ACEM)’s plan to acquire stake in unit ACC Ltd.

Remove Hurdles

India’s gross domestic product probably grew 4.6 percent in the three months ended June 30, according to a median estimate of 41 economists in a Bloomberg News survey. That’s the slowest pace of growth in more than four years. The government is scheduled to release the data on Aug. 30.

Birla is betting on an economic recovery in the $1.8 trillion economy. To revive growth Prime Minister Manmohan Singh’s government is reviewing progress of the power, road and port projects and trying to remove hurdles.

“Our highest priority is to get the investment cycle restarted,” Finance Minister Palaniappan Chidambaram told reporters yesterday in New Delhi. Indian power projects worth $12.75 billion, stalled because of a lack of fuel linkages, will sign supply accords with Coal India Ltd. by Sept. 6, he said.

Cement consumption may expand at a compounded average growth rate of 7.9 percent in the three years to 2016 led by demand from power and road projects, according to a research by Credit Analysis & Research. Demand grew 5.6 percent in the three years to March 31, data show.

“The consolidation will be good for the cement industry,” Centrum’s Singh said in a phone interview. “The short term challenges of slowing cement demand will not be sustained as not much new capacities are coming up and very soon demand should catch up with supplies.”

To contact the reporters on this story: George Smith Alexander in Mumbai at galexander11@bloomberg.net; Abhishek Shanker in Mumbai at ashanker1@bloomberg.net

To contact the editors responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net; Jason Rogers at jrogers73@bloomberg.net

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