The Aditya Birla Group will work with banks and Jaiprakash Associates (Jaypee) towards creating a separate corporate structure for the cement operations of Jaypee that it has agreed to acquire, if the amendment on a key mining legislation, stuck in Parliament, does not come through within three months.
Under the Mines & Minerals (Development & Regulation) Act, mining rights do not get automatically transferred to a new owner if the acquisition is not 100%. Ownership of mines can only be obtained in auctions.
Aditya Birla group firm UltraTech Cement recently acquired 22.4-million-tonnes-per-annum (mtpa) cement capacity of Jaypee in an all-debt deal estimated at around Rs 16,500 crore. Jaypee has a total cement capacity of about 27 mtpa. If the MMDR Act amendments are not approved, Jaypee would need to create a separate entity out of the assets being sold to UltraTech, for the deal to proceed. It will refinance Jaiprakash’s borrowings at lower rates if the MMRDA amendments get the nod.
After acquiring Jaypee’s assets, UltraTech will become the fifth largest cement maker in the world.
“We have considered both scenarios. If the amendment goes through, it is a clear asset purchase. If not, there are structures we have in mind, with which we will be able to do the deal,” Atul Daga, chief financial officer UltraTech, told HT.
He said the deal is not entirely linked to the mining amendment. “The agreement is for specific assets. It’s more about how you structure it. I do not want to comment on the structure till the closure of the definitive agreement,” he said.
While UltraTech will not raise equity for the deal and fund it via cash and some debt from banks, banking sources said about Rs 12,000 crore worth of loans would be transferred to the Birlas.
Faced with rising bad loans and the Reserve Bank’s March 2017 deadline to clean up their debt-saddled books, banks have been prompting companies with large loans to sell assets. Sometimes these sales are at a low price, such as the UltraTech-Jaypee transaction, which is valued at less than $110 a tonne. Building a similar capacity would cost over $140 a tonne.
Lenders to Jaypee have been pushing for sale of the company’s cement assets in a bid to reduce the group’s overall debt of `29,000 crore.
“UltraTech has the balance sheet strength to digest this deal,” said Vineet Verma, analyst with Nomura Research. “Based on our estimates, the acquisition will be EPS-dilutive (negative) in 2017-18/2018-19 and will be marginally accretive (positive) in the third year only if UltraTech is able to ramp up profitability of acquired assets.”
UltraTech accounts for a third of the Aditya Birla Group’s market capitalisation.
Some analysts feel the deal leads to monopoly issues, as UltraTech will become a 90.7-mtpa goliath. However, Daga said it would take the company to new markets, so monopoly issues would not get triggered. The question of monopoly arises if a single entity commands more than 25% of a market segment.