Cement mergers and acquisitions stumble on valuations

Consolidation has been the buzzword for more than a year now in the world’s second-largest cement market, which has been weighed down by overcapacity.

So far, only two deals  — that of Kohlberg Kravis Roberts & Co, the US-based private equity firm, buying a 20% stake in Avnija Properties, the cement arm of Dalmia Cements, and French cement major Vicat SA buying a controlling stake in Hyderabad-based Bharathi Cement — have taken place.

A raft of other negotiations haven’t fructified.

Blame rising input cost, weak pricing power and therefore, lower valuations.

Holcim AG, the largest cement manufacturer in the world, which owns controlling stake in both ACC and Ambuja Cements, has been aggressively hunting in Rajasthan for an acquisition for some time now, say sources close to the development.

An investment banker who did not wish to be identified said that Holcim has been eyeing a beachhead in the north, but is not ready to pay more than $120-130 per tonne.

“None of the players in that region are ready to sell out at such valuations now,” the banker said.

The Swiss giant was talking to RK Marbles-owned Wonder Cement, which has a capacity of 2.5-3 million tonne per annum and limestone reserves for a possible buyout but nothing concrete has emerged, another analyst said.

“Sure the plant is not ready, but RK Marbles is looking at higher valuations that buyers are not willing to shell out,” the analyst said.
Neither Holcim, nor RK Marbles, could be reached for comment.

“Smaller players in the south are asking for $150-160 per tonne — now that’s impossible under present market conditions. Sure, these players are now able to increase prices but by the time monsoon arrives in three months, prices will decline. Average capacity utilisation in the industry was 71% last few months.

Ensuring profitability with such numbers is a difficult task,” said the analyst.

The big deals that were talked about, but didn’t come true included the Nagpur-based Murli Agro’s with Italicementi and Cemex, and the Hyderabad-based Penna Cements’ with Cemex.

The average value of cement acquisitions between 2005 and 2008 was $168 per tonne compared with $121 per tonne a decade before that, according to the analyst.