UltraTech Cement Ltd’s Rs.5,400 crore purchase of two cement assets from Jaiprakash Associates Ltd will not go through in a stand-alone deal.
Instead, the two assets in Madhya Pradesh with a combined capacity of producing about 5 million tonnes of the building material will be folded into a larger transaction under which Jaiprakash Associates is seeking to divest its entire cement capacity, said two people familiar with the development.
UltraTech, a part of the Aditya Birla Group, is one of the three potential bidders for the nearly 20 million tonne cement production capacity of Jaiprakash Associates, which is trying to raise funds to pare debt.
“Those two assets are now part of the bigger deal,” said one of the two persons cited above, requesting anonymity.
The UltraTech-Jaiprakash deal, signed in December 2014, is the second large transaction in the cement industry to have come unstuck in February because of regulatory hurdles.
Earlier this month, LafargeHolcim called off its Rs.5,000 crore deal with Birla Corp. to sell two cement units in eastern India.
The Franco-Swiss cement giant said it will divest its interest in all Lafarge India assets to comply with the competition rules in India.
Under pressure from its bankers to repay debt, Jaiprakash Associates is looking to find a buyer for its cement units spread across the central, northern and southern parts of the country.
The second of the two persons cited in the first instance said the deadline for closure of the UltraTech-Jaiprakash deal may have lapsed. This person said UltraTech “is fully aware” that the Madhya Pradesh assets would be part of a larger deal.
UltraTech Cement declined to comment. Jaiprakash Associates also declined to comment.
Jaiprakash Associates was supposed to receive binding bids from financial and strategic investors by the middle of February for its entire cement capacity, but bankers are still waiting for more bids to come in by the end of the month, said the first person cited above.
“Companies who were part of the diligence process and are interested to bid include global private equity firm KKR and Co., UltraTech Cement Ltd and Dalmia Cement (Bharat) Ltd but the bids are yet to come in,” the first person added.
Both Dalmia Cement and KKR, in emailed responses, declined to comment on what they described as market speculation.
“If UltraTech ends up acquiring this asset it will be just an incremental addition to their capacity whereas if Dalmia ends up buying the asset it will transcend them into a national player rather than their existing regional concentration,” said Ashutosh Maheshvari, managing director and chief executive officer at Motilal Oswal Investment Advisors Pvt. Ltd.
“Jaypee’s cement assets are spread across three different geographies—Madhya Pradesh, Himachal Pradesh, and Andhra Pradesh—making it a non-coherent deal to do if someone does not have an existing presence in the Indian cement industry,” Maheshvari added.
While the process of selling the cement assets of Jaiprakash Associates has begun, the deal will not go through before a proposed amendment to the existing Mines and Minerals Development and Regulation (MMDR) Act is cleared.
The MMDR Act currently does not allow a company to transfer rights to an allotted mine to another company or subsidiary. Given that limestone is a key raw material in the cement-making process, it is difficult to execute the sale of a cement unit without selling the related limestone mines as part of the deal.
According to a clause in the Act, transfer of the mining licence is allowed only for mines that have been auctioned. Most of the operational limestone mines in India were allotted and not auctioned.
This regulation, in fact, is the reason that the original deal between Jaiprakash Associates and UltraTech Cement failed to close even a year after the agreement was signed.
On 12 January, Mint reported that the government was considering amending the Act to allow for the transfer of mines and that the mines ministry had put up the changes for a review on its website.
Jaiprakash Associates’ proposal to sell all its cement assets will also hinge on this amendment.
“It will be difficult to execute the deal without the amendment clarity on the transfer of limestone mines,” said the second person mentioned above.
LafargeHolcim is trying to sell its stake in Lafarge India Pvt. Ltd in a deal that is currently under negotiations. Jaiprakash Associates, however, does not have this option due to cross-holdings between group companies.
According to a December 2014 investor presentation on the company’s website, Jaiprakash Associates has the group’s engineering and construction, cement, real estate and hospitality businesses under it.
In addition, Jaiprakash Associates holds a 60.72% stake in Jaiprakash Power Ventures Ltd and 71.64% in Jaypee Infratech Ltd.
“There are so many assets and shareholdings under Jaiprakash Associates that it is difficult to execute the deal. If the company looks to transfer all the other shareholdings and assets in Jaiprakash to another company and then sell a 100% stake in Jaiprakash Associates which will hold only the cement assets, it will involve shareholder approvals and a large sum of stamp duty to be paid, which is a very unviable option,” said another investment banker who is not directly involved in the deal but acts as a consultant for cement clients.
For the Jaypee group, the inability to close the deal with UltraTech Cement will mean a delay in its asset monetization plans.
The group had estimated debt of Rs.75,000 crore at the end of fiscal 2015, according to the 21 October edition of Credit Suisse’s House of Debt report.
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