Pricey quotes stall buyout of small cement makers

High premiums sought by smaller cement companies are stalling mergers & acquisitions, said sources familiar with the situation.

An investment banker with an international financial firm said though due diligence is on in several cases, small players are seeking a lot of premium, which is hampering culmination of deals. “The valuation expectation is too high”.

For example, Nagpur-based Murli Agro, which separated its 2.4 mt operational cement business and can raise capacity to 8-10 mt, was in talks with Holcim controlled Ambuja Cements for possible sale. After three revisions in the offer price, it sought approximately $250 per tonne. Ambuja walked off.

An analyst from a domestic brokerage said it does not make sense for international players to pay high premiums for acquisitions as their borrowing costs are low. “For international players, the borrowing cost for acquisitions is lower at around 8% whereas Indian players pay around 12%,” the analyst said.

However, with the domestic industry, the second-largest in the world, reeling under the pressure of oversupply and a resultant drop in prices, smaller firms are bound to be taken over. “This year is going to be tough in terms of realisations and growth. The smaller players, which have been doing business on miniscule margins, will be eventually bought out because the big players are looking at a 10-year growth perspective, not a seasonal 1-2 year basis,” the investment banker said.

There have a few mergers and acquisitions in recent times.

For instance, French major Vicat Cement recently bought out Andhra Pradesh based Bharathi Cement for close to $200 per tonne. Then Mexico’s Cemex coughed up $150-160 per tonne for Penna Cement, another Deccan-based firm.

UltraTech, part of the Aditya Birla group, also inked an agreement to acquire ETA Star Cement Company LLC, a Dubai based company that has operations in Bahrain, UAE and Bangladesh. The value of this deal works out at $125 per tonne.

Analysts say that the UltraTech deal is expensive. “At present the valuation for any Middle East company is around $80-85 (per tonne) with business margin of 12%, whereas the margins for Indian cement companies are 24-25%. It will take around 7-8 years for the acquisition to break even, while an Indian acquisition would take 5-6 years depending on the price paid,” said an analyst.

The management of Grasim — which is in the process of merging its cement business with UltraTech and will have a 60% stake in the company — expects to close the ETA deal by the end of this quarter. Adesh Gupta, CFO, Grasim, said the company is looking at further acquisitions in the Indian Ocean rim.

Rupesh Sankhe, research analyst with Angel Broking, said, some of the larger players have seen improvement in balance sheet in last 3 years. “Though FY11 would put pressure on margins, the outlook is better from mid FY 12.”