Birla’s UltraTech Cement Ltd. (UTCEM), India’s biggest maker of the construction material, yesterday said it will buy Jaiprakash’s factory in western India for an enterprise value of 38 billion rupees ($599 million). The purchase will give UltraTech access to limestone reserves, a thermal power plant and a jetty, the company said in a statement.
The billionaire’s biggest acquisition in more than two years will help UltraTech raise capacity and boost market share as rivals including Holcim Ltd. (HOLN) expand in Asia’s third-largest economy. Birla, who took over as chairman of the group in 1995, seeks to expand revenue by 63 percent to $65 billion by 2015.
“We have the balance sheet, the wherewithal, the cash flows and knowhow of running a cement unit,” Birla said in an interview with Bloomberg TV India, referring to expansion including through acquisitions. “Therefore, it is extremely attractive for us to expand in this market.”
UltraTech will assume 36.50 billion rupees of debt from Jaiprakash’s Gujarat unit, Birla said at a briefing in Mumbai yesterday. UltraTech will also pay as much as 1.5 billion rupees in shares to Jaiprakash, the builder of India’s only Formula One track, once the deal is completed in nine months.
UltraTech, including units, had 33.1 billion rupees in cash and short-term investments as of March 31, according to data compiled by Bloomberg. The company will borrow and use its profit to fund the purchase, Birla said.
The biggest advantage for a conglomerate such as Birla’s is that they have resources that allows them to build businesses even toward the end of an economic cycle, said Saurabh Mukherjea, chief executive officer for institutional equities at Mumbai-based Ambit Capital Pvt. “When everyone else is debt laden and trying to come up for air, the Birlas can swim that much deeper with their tank of oxygen.”
The sale will help Jaiprakash reduce its debt, of about 230 billion rupees, by 15 percent, Chairman Manoj Gaur said in New Delhi yesterday.
“Debt is not a curse,” Gaur said. “But when the economy falls from 9 percent to 4 percent, it must be reduced.”
Jaiprakash, which has risen 24 percent in the past month, dropped 6.1 percent to 40.75 rupees as of 12:51 p.m. in Mumbai. UltraTech fell 0.4 percent to 1,741.55 rupees.
UltraTech plans to revamp the debt after the purchase, Birla said. It will assume 20 billion rupees of loans, and pay 16.5 billion rupees of the remaining debt to Jaiprakash, he said. The plan to refinance the liabilities will help lower borrowing costs by 300 basis points, Birla said.
The deal values capacity at Jaiprakash’s Gujarat unit at 7,936 rupees a ton, according to Birla. That compares with 7,847 rupees a ton that Holcim’s Ambuja Cement Ltd.’s is estimated to be paying for a stake in unit ACC Ltd., according to Sudeep Anand, an analyst at IDBI Capital Market Services Ltd.
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 one of Jaiprakash’s mines, the people said.
UltraTech has an installed capacity of 54 million tons a year, according to the company’s website. With this acquisition and additional capacity planned, the total will rise to 70 million tons by early 2016, Birla said.
Birla, India’s seventh richest man, is ranked 143 in Bloomberg Billionaires Index with a net worth of $8.4 billion.
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 Mumbai-based Credit Analysis & Research. Demand grew 5.6 percent in the three years to March 31, data show.
The transaction will be accretive in the next three years, Birla said. Standard Chartered Plc advised both UltraTech and Jaiprakash on the deal.
“This is a good deal for the buyer as it’s cheaper than building cement capacity of this size,” said Amit K Srivastava, analyst at Nirmal Bang International Equities. “The asset will have cash flow and it also comes with mines and all regulatory approvals.”
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