From ET Realty
MUMBAI | KOLKATA: Birla Corp has emerged as the front runner to acquire Anil Ambani’s cement business, a wholly-owned arm of flagship Reliance Infrastructure, following a competitive sale process that also saw rival offers from leading private equity buyout funds.
The Kolkata-headquartered group is currently the only potential buyer engaged in advanced commercial negotiations with Anil Ambani-promoted Reliance Group, said three people aware of the discussions.
The other serious contender in the fray was Blackstone private equity, which had teamed up with Sumit Banerjee, former vice chairman of Reliance Cement. Banerjee was also chief executive of the infrastructure businesses of Reliance Infrastructure before stepping down in 2013.
Birla Corp’s offer in the range of Rs 5,000-5,100 crore is said to be in line with Reliance Group’s expectations. It trumped competing PE bids pegged at Rs 4,200-4,500 crore, said those cited above. A shortlist had been drawn up after final offers were submitted on Christmas Day. Others who filed preliminary expressions of interest included Baring Private Equity Asia, Carlyle, JSW Cement, JK Lakshmi Cement and China Resources Cement Holdings. ET first reported on the contenders on December 29.
A final decision is expected in the next fortnight but an announcement may come as early as next week. A Reliance Infrastructure spokesperson declined to comment. Birla Corp Chairman Harsh Lodha was not available for comment. Birla Corp has been among the most acquisitive mid-sized cement companies since last year. In August, it agreed to acquire two similar-sized assets from Lafarge India for Rs 5,000 crore but that transaction is yet to be completed following a regulatory logjam over the transfer of limestone mines.
To avoid the same obstacles, instead of a slump sale like Lafarge, Reliance has decided to sell shares in the company that owns the plants, mining concessions and prospective leases. Birla Corp, established in 1919, is part of the MP Birla Group that’s engaged in cement and jute, with the former accounting for over 90% of revenue. With a total operational cement capacity of around 9.3 million tonne per annum (MTPA), it has units in Rajasthan, Madhya Pradesh, Uttar Pradesh and West Bengal.
If the Lafarge and Reliance deals go through, Birla Corp will have a total capacity of around 16 MTPA. The company has a strong balance sheet that it’s looking to leverage to fund acquisitions. At the end of March 2015, it had Rs 2,549 crore of total reserves, including cash and cash equivalent of Rs 468 crore. For the Lafarge deal, it plans to use Rs 1,500 crore of internal accruals while raising additional debt of Rs 3,500 crore from a consortium of Deutsche Bank, Axis Bank, State Bank of India and IndusInd Bank.
Reliance Cement, which started operations in 2007, has a total installed capacity of 5.8 MTPA. Of this, 2.8 MTPA is at its main unit in Maihar, Madhya Pradesh, which was commissioned last year. The remaining units are in Kundaganj in Uttar Pradesh and Butiburi in Maharashtra. The company has leases to extract limestone in Madhya Pradesh, Karnataka, Uttarakhand, Chhattisgarh, Himachal Pradesh and Rajasthan. Reliance Cement is sold in Uttar Pradesh, Madhya Pradesh, Jharkhand and West Bengal and in some cities of Maharashtra.
The company’s plan had been to scale up output to 15 MTPA over five years since inception with integrated units in Madhya Pradesh and Maharashtra, but the capital-intensive plans were shelved as Reliance Group got saddled with debt. It had consolidated debt of Rs 26,630 crore at the end of June, according to its website.
Reliance Infrastructure had mandated Morgan Stanley and SBI Caps to manage the sale process. The original strategy envisaged most of the units being set up in Madhya Pradesh on the strength of the group’s Sasan ultra mega power project. The idea was to use fly ash generated from the power plant at the cement units fly ash is a key raw material for cement. Ambani had even roped in Ambuja Cements’ former managing director Anil Singhvi to lead the group’s entry into the segment but he left after the initial years.
Reliance Cement will benefit Birla Corp in ways that are similar to Lafarge in terms of operational synergy and consolidating market share in east and central India, analysts said. That will strengthen its position in the region after Holcim-Lafarge, Ultratech and Dalmia Bharat, they said.