Aurum Deal of the Month – August 2016

Soap and Detergent-maker Nirma Limited is acquiring the entire cement operations (total capacity of 11 MTPA) of Lafarge India from Switzerland-based global building materials major- LafargeHolcim, at an enterprise value of USD 1.4 bn (~INR 9,400 crore) in India’s largest leveraged buyout till date.

EV/ Tonne: USD 127/ tonne

About the Transaction

LafargeHolcim has entered into a definitive agreement with Nirma Limited for selling its entire India business, subject to approval by Competition Commission of India. The proceeds of the divestment will be used by LafargeHolcim to reduce its debt. This transaction was essential for completing the India leg of the global mega merger between Holcim and Lafarge announced last year. LafargeHolcim has a divestment target of CHF 3.5 billion in 2016 and has also completed divestment of its business in South Korea and is on course for selling its minority shareholding in Saudi Arabia. Post the transaction, LafargeHolcim will continue to operate in India through its subsidiaries ACC Limited and Ambuja Cements Limited which have a combined cement capacity of over 60 MTPA.

Established in 1980 by Dr. Karsanbhai Patel, Nirma is a closely held group which produces industrial and consumer products like detergents, salt, soda ash, caustic soda, cement and packaging. It has 12 manufacturing facilities across India and USA and is the largest manufacturer of soda ash in India. In FY2016, Nirma recorded consolidated net sales of INR 7,240 crore and net profit of INR 760 crore.

The Lafarge-Nirma deal marks the entry of Nirma as a serious contender in the Indian cement industry. Nirma has an existing 2.3 MTPA plant in Rajasthan which was commissioned in 2014 and another proposed plant in Gujarat. This transaction will ramp up Nirma’s capacity to 13.3 MTPA, making it the sixth-largest cement player in the country in terms of capacity after Ultratech (91 MTPA), ACC Ambuja (60+ MTPA), Shree Cement (26 MTPA), Dalmia Bharat (25 MTPA) and India Cement (15.5 MTPA).

Transaction Background and Process

In order to comply with local competition rules in India post global merger of Holcim and Lafarge, LafargeHolcim was directed by Competition Commission of India (CCI) to sell 5.2 MTPA of its east India assets in April 2015. In August 2015, Lafarge Holcim had signed a definitive agreement with Birla Corp for selling its east India cement assets for INR ~5,000 crore. However, that transaction ran into regulatory hurdles over difficulties relating to transfer of mining rights of Lafarge’s limestone reserves. Under the Mines and Minerals (Development and Regulation) Act (MMDR Act), sale of mines linked to cement units was prohibited at the time. Birla Corp- Lafarge deal was finally called off by the seller in February 2016. Lafarge then submitted a proposal to CCI for selling its entire cement business of 11 MTPA. In February 2016, LafargeHolcim received a revised order from the CCI for the sale of its entire India operations, following which it launched a formal divestment process for Lafarge India. In turn, Birla Corp announced acquisition of entire cement business (capacity of 5.5 MTPA) of Reliance Infrastructure for an Enterprise Value of INR 4,800 crore in February 2016. Further in May 2016, MMDR Act was amended to allow transfer of captive mines in an M&A without need for an auction.

For the revised Lafarge deal, CCI had barred any player with over 5% of total installed capacity in the relevant geographic market from bidding for Lafarge’s units. It also barred Baring Asia and KKR from bidding as these were considered to be related or conflicting parties to Lafarge. Baring had invested USD 256 million in Lafarge India in May 2013 for a 14% stake, hence considered a related party. KKR was barred for being the largest institutional shareholder with 8.5% stake in Dalmia Bharat which has sizeable cement operations in eastern India.

As per public sources, a total of 5 bidders were finalized as contenders for Lafarge’s India operations. Ajay Piramal Group, JSW Cement, Mexico-based Cemex and Chinese cement player Anhui Conch Cement Company were the other bidders in the fray, apart from Nirma.

What Nirma gets in the deal?
» Three integrated cement plants and two grinding stations with a total capacity of ~11 MTPA
» 2 plants in Chhatisgarh (Sonadih and Arasmeta)
» 1 plant in West Bengal (Mejia)
» 1 plant in Jharkhand (Jojobera)
» 1 plant in Rajasthan (Chittorgarh)
» Cement Brands- Concreto, Duraguard, Duraguard MF, ProWall LITE and Infracem
» 71 Readymade Concrete (RMC) plants in India
» RMC Brands- Mega series, InstaMix, Artevia, Agilia, Morpla and Hydromedia
» Captive Limestone Mines of Lafarge India (Nirma to pay transfer charge to the government as per provisions of the amended MMDR Act)
» Approx. 6,000 employees from Lafarge India

Deal Rationale for Nirma

Nirma has lost market share in the detergents business (low to mid value segment) in the last few years because of intense competition from peers like HUL and Henkel India. With backward integration, the company now focuses on manufacturing key raw materials for manufacturing of detergents- soda ash and linear alkyl benzene (LAB). Soda ash and LAB accounted for ~60% of consolidated revenue of Nirma for 2014-15. But the price of domestic soda ash is linked to international prices, which is vulnerable to price fluctuations and volatility especially due to Chinese imports. A strong cement business will enable Nirma to de-risk from highly competitive businesses like soda ash and detergents.

The acquisition of Lafarge assets will help Nirma leapfrog into the big league of Indian cement industry especially in East India, which is a better market in terms of demand and pricing. Lafarge has a strong market position in eastern India with estimated market share of 13-14%, and sound operating efficiency with above-average per tonne operating profitability. Further, Nirma had invested close to Rs. 1,300 crore in its 2.3 MTPA cement plant in Rajasthan. Chittorgarh plant of Lafarge is also in the same state, which will help Nirma gain a stronger hold in the region.

Nirma would also get access to limestone reserves of Lafarge in South India for which it has all the required approvals. Estimated 6-8 MTPA additional cement capacity can be added in south through these limestone reserves.

Deal Structure and Transaction Funding

Nirchem Cement Limited (NCL) is under the process of being incorporated as a 100% subsidiary of Nirma Limited. Post incorporation, NCL will acquire 100% stake in Lafarge and will be subsequently merged with Lafarge over the near term.
As per credit rating agency CRISIL, Nirma is likely to fund the deal largely through borrowed funds. Non-convertible debenture (NCD) issue of INR 4,000 crore is being raised in NCL, post NCL’s incorporation. Additional 3,500 crore of debt is being raised at Nirma level for the transaction. The promoters of Nirma will infuse another INR 500 crore and the balance will be funded through internal accruals of Nirma.

Nirma’s consolidated adjusted net worth as on 31 March 2016 was Rs.3,900 crore and its adjusted debt was Rs.1,340 crore. Post the transaction closure, Nirma’s Debt to EBITDA ratio at consolidated level is estimated to reach ~4 times.

Recent Transactions in Indian cement industry

The cement industry in India is undergoing a wave of consolidation with top players in the industry acquiring assets and players like Jaypee and Lafarge India making an exit from the business. Nirma-Lafarge deal is the second biggest transaction in Indian cement space after the recent acquisition of Jaypee’ cement assets (21.2 MTPA) by Ultratech Cement for INR 16,189 crore. Other recent transactions are listed below:

aurum deal august

The valuation of Nirma-Lafarge deal is around USD 127 per tonne, which is much lesser compared to USD 145 per tonne valuation commanded by Lafarge India in its aborted deal with Birla Corp last year and slightly higher than USD 114 per tonne valuation which Ultratech Cement paid to acquire Jaiprakash Associates’ entire cement assets. However, we believe that Nirma has got a fairly good deal considering:

» Superior profitability of Lafarge cement units
» Quick entry into the fast growing Eastern India cement market. Nirma was earlier facing challenges in its organic Greenfield expansion plans in Gujarat due to environment clearance issues.
» Access to Lafarge’s limestone reserves provides operational synergies with Nirma’s soda ash business, which uses limestone as raw material as well
» Additional RMC assets of Lafarge India along with popular brands like Concreto, Duraguard and Infracem

JSW and Piramal seem to have lost out an opportunity to gain scale while growing organically is challenging in the current regulatory regime. JSW has 6.4 MTPA of slag based capacity and was looking to get scale with this transaction; while Piramal is a new entrant in sector and has been debt funding small cement companies over last few months.

Disclaimer: Aurum Equity Partners LLP was not a part of this deal in any way.