Dhirendra Tripathi Moneycontrol News
Investor concerns over balance sheet impact and regulatory issues notwithstanding, Orient Cement’s plan to acquire part of Jaypee Group’s cement capacity is in the final stages and the deal could be announced shortly, according to people familiar with the development.
The arrangement between the two companies, announced on October 6 last year, was a combination of two assets of the Noida-headquartered company. One was Orient’s acquisition of Jaiprakash Associates’ entire stake in Bhilai Jaypee Cement, a 74:26 joint venture of the Jaiprakash Gaur-promoted company and Steel Authority of India Limited (SAIL). The enterprise value of the joint venture company was pegged at Rs. 1,450 crores.
The joint venture has a 1.1 mtpa clinker unit at Satna in Madhya Pradesh and a 2.2 mtpa grinding unit at Bhilai in Chhattisgarh.
The other asset that the CK Birla Group company signed up to acquire was Jaiprakash Power Ventures' 2 mtpa grinding unit at Nigrie in Madhya Pradesh for a total consideration of Rs 500 crore.
“The top management of both Orient and Jaypee Group are meeting this week to thrash out the last-minute details,” one of the officials part of the deal-making process told Moneycontrol. “It got held back due to various unforeseen reasons that were in no way connected to the deal.”
Two issues surrounding the deal have occupied investor mindspace and the Orient Cement stock is down 37 percent since the deal was first announced.
“Investors are concerned over how Orient would fund the deal given that its balance sheet size is not much bigger than the deal size,” an analyst with a local brokerage in Mumbai told Moneycontrol.
At the end of March 2016, Orient Cement had a balance sheet size of Rs 2,863 crore while the enterprise of the entire deal came at Rs. 1,950 crore. Orient’s final outgo would be adjusted after accounting for net debt and working capital at closing.
“Please understand that the promoters have around 40 percent stake in Orient Cement. So they will be most affected by the deal and therefore won’t do anything that harms shareholder value,” the official, quoted first, said.
Promoter holding in Orient Cement came in at 37.5 percent at the end of December, according to information available on BSE website.
The transaction will be funded through a mix of internal accruals and debt and equity funding to target a prudent debt to equity ratio.
The other concern related to SAIL’s consent for the deal. Dalmia Bharat had to acquire SAIl’s 26 percent stake in Bokaro Jaypee Cement in November 2014 after the Dalmia company bought Jaiprakash Associates’s 74 percent stake in the joint venture company. The official insisted that such a scenario would not be applicable in this case.
Investors were worried about the fate of the limestone mine attached to the Bhilai JV since the mine was in SAIL’s name and if SAIL insisted that Orient bought out its stake like it did in the case of the Dalmia deal, then Orient’s right to the mine would become uncertain.
“SAIL will stay invested in the joint venture with Orient. The mine will remain with SAIL and therefore the joint venture company would also continue to have access to those limestone deposits,” the official said.
Jaypee currently has a cement capacity of 10.6 mtpa while Orient wants to take its capacity to 15 mln tn by 2020 from 8 mtpa now.
While the acquisition is in line with Orient's long-term to enhance its manufacturing capacity, the deal is even more crucial for Jaypee as the group seeks to cut down its at least Rs 40,000 crore debt.
In the last two years, the group has sold almost two-thirds of its cement and more than half its power generation capacities to bring down its debt.
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