UltraTech Cement, India?s largest cement maker and part of the $35-billion diversified Aditya Birla Group, will look to purchase its partner?s stake in Dubai-based Star Cement Co to make it a fully-owned overseas subsidiary, two people familiar with the deal said.
?The group has an option to purchase the local partner?s stake when they bought the majority control company from Dubai-based ETA Star Group,? one of the two persons familiar with the deal said.
?We have an 80% stake in Star Cement. It is not our intent to raise it any further in the immediate future,? UltraTech director OP Puranmalka said. The Birla Group, with interests in aluminium to mobile telephony, had in September 2010 purchased a controlling stake from ETA Star Group through UltraTech Cement Middle East Investments Ltd, a wholly owned subsidiary of UltraTech Cement.
The remaining stake in Star Cement was held by a local partner with whom ETA had partnered to build cement plants. UltraTech had purchased ETA?s stake at an enterprise value of $380 million in 2010. Enterprise value is the market value of the entire business, including debt. Analysts tracking UltraTech say the company paid $37 million for equity value in September 2010 to purchase ETA’s stake, but the company had disclosed only the enterprise value at the time of the deal.
The deal gives the country’s largest cement maker access to the West Asian market, until now serviced by the company’s plants in Gujarat to save logistics costs. Before its Star Cement stake purchase, UltraTech used to export clinker (the main raw material in cement) and grind it in the unit in Middle East to sell it. Access to Star Cement plants allowed UltraTech to sell its own brand there.
?The company benefits by selling 50% of volumes in Oman, which is less competitive unlike other UAE markets,? an analyst tracking the company said. ?I do not see significant returns from this investment in two years.? He cannot be quoted as his firm does not comment on specific companies.
The United Arab Emirates (UAE) cement market has a total capacity of 30-35 million tonnes (mt), but demand slackened after the Dubai real estate market slowed down. Star Cement has an annual capacity of 3.2 mt spread across Dubai, Sudan, Bangladesh and Bahrain.
Currently, Star Cement has 2.3 million tonnes capacity through two plants in the UAE along with 0.4 million tonne in Bahrain and 0.6 million tonne in Bangladesh. The company?s bulk cement terminal in Sudan has a 0.5 million tonne capacity, according to its website.
The Aditya Birla group has already announced that it will invest up to Rs 16,000 crore in the cement business over the next five years to add 25 million tonnes of capacity and maintain its current market share of 19%.
UltraTech will find it difficult to purchase Indian cement makers as valuations are high. ?I do not think anyone is a seller below $200 a tonne,? another analyst from a foreign brokerage said. ?Cement prices have consistently been rising in the past few months and demand may further pick up after the elections in five states.?