After a lull of about one and a half years, the 280 million-tonne cement industry witnessed a few mergers and acquisitions (M&A) in 2010. Holcim Group company ACC, India?s second largest cement manufacturer, acquired stake in two small cement companies, a 100% stake in Encore Cement and Additives and 45% Asian Concrete and Cement. ?Both the acquisitions are small but interesting from the point of view of distribution cost, logistics cost and market rational,? Sumit Banerjee, who was then the CEO of ACC had earlier told FE.
The trend was followed by French cement maker Vicat SA, that bought 51% stake in Hyderabad?s Bharathi Cement, promoted by YS Jagan Mohan Reddy for an enterprise value (EV) per tonne of about $135-140 per tonne, which was higher than the replacement cost ($90-100 per tonne). Replacement cost is the cost involved in setting up a greenfield plant.
Experts believe there would have been more M&As in the sector during the year, but the deals were stuck due to higher valuations. Two companies that made headline in 2010 for higher valuations were Hyderabad- based Penna Cement and Nagpur-based Murli Cement that still are on a hunt for a strategic partner and are negotiating with a foreign cement manufacturer for a possible takeover.
Murli Cement, which started production of its 3 million tonne per annum (mtpa) cement plant in Chandrapur in April 2010, is on a hunt for a buyer since then. According to sources, the promoters are expecting an EV of close to $200 a tonne. However, the bids are understood to be in the range of $160-180 a tonne. The deal, if done at this price, would be very expensive, say experts.
Meanwhile, private equity fund KKR invested Rs 750 crore in a wholly owned subsidiary of Dalmia Cement, and Jaypee Cement was reported to be buying a controlling stake in Pune-based Zawar Cement?s defunct grinding unit at Wadi, in Karnataka?s Gulbarga district.
Players like Reliance, Holcim and Lafarge are still waiting for an appropriate time to consolidate. Meanwhile, Holcim Group has started strengthening its stake in ACC through the creeping acquisition route. Ambuja Cements and three other Holcim entities have raised their stake in the company by 2.01% to 48.21% through open market transactions in December. It is also understood that Gujarat Sidhee, Saurashtra Cement and Andhra Cement are also waiting for good valuation to get acquired. The industry, which grew by 6-7% in 2010, is expecting 10% growth in 2011. Cement prices dipped by 3% year on year (YoY) in 2010 and the cost grew 15% YoY, making it tough for cement players to survive. Recently, Ashish Guha, MD, Heidelberg Cements reportedly said, ?We are in talks with various players who are in the play right now. But there is a mismatch in terms of valuation expectations and what we want to pay as fair value. So I don?t know how long it will take but we are definitely focused on acquisitions in India.?
?Few high valued transactions in the past have increased the expectations of the promoters here. Despite many targets available in the Southern region, deals are stuck on valuations,? said an investment banker, requesting anonymity.