INDIA - Private equity, strategic investors vie for LafargeHolcim India cement units

Byjirong

Updated Wed, 06 Apr 2016 10:51:16 GMT

Advisors to the sale of Franco-Swiss cement maker LafargeHolcim’s 11-million tonne (mt) cement capacity in India are expecting at least seven to eight bids for the assets as the firm nears the deadline for submission of non-binding bids, said three people familiar with the process.

In February, LafargeHolcim announced its plans to sell its entire cement portfolio of 11 mt held under Lafarge India Pvt. Ltd to comply with anti-trust regulations. Non-binding bids for the sale are due by 15 April, said the people quoted above.

A number of private equity firms have expressed preliminary interest in the assets.

Singapore’s sovereign wealth fund GIC Pte Ltd and private equity (PE) funds Temasek Holdings Pte Ltd, Advent International, Barings Asia Private Equity, Blackstone Group Lp, Aion Capital and the investment arm of Piramal Group are evaluating the deal, said two of the three quoted above who are involved in the transaction. Both requested anonymity as talks are confidential.

In addition to private equity firms, strategic investors Shree Cement Ltd, JSW Cement Ltd and Irish cement maker CRH Plc have expressed interest, they said.

“The divestment of assets in India is underway and we have a list of suitable candidates interested in acquiring the former Lafarge’s business in India. You will understand that at this stage we are not in a position to give you any further details on the divestment process, neither in terms of expected valuations nor with regard to specific assets,” a spokesperson for LafargeHolcim said in an email response.

The sale of Lafarge India’s assets will be one of the last large-block cement assets to go on sale and offers potential investors an opportunity to get a significant foothold in the sector in one shot. Lafarge holds its 11 mt cement capacity across Chhattisgarh, Jharkhand, Rajasthan, Haryana and West Bengal.

As such, the assets could fetch bids upwards of $150 per tonne, said the third person quoted above, also seeking anonymity.

“At present, one of the big four auditing firms is conducting third-party vendor due diligence on Lafarge’s assets. Once the diligence is complete, those who submit non-binding bids will interact with the Lafarge management, most likely in the third week of April,” said one of the people mentioned above.

Bankers expect the transaction to close by July. In an email response, Barings Asia, Aion Capital, Advent International, Piramal Enterprises Ltd and Temasek declined to comment.

A JSW spokesperson said, “With reference to your query, JSW Cement wants to clarify that as part of our growth strategy, the company looks to evaluate various opportunities, both organically and inorganically.” However, he declined to comment on the deal specifically.

Prashant Bangur, joint managing director, Shree Cement, in a text to Mint said, “We are not looking at Lafarge.”

An email query sent to CRH and Blackstone on Sunday remained unanswered as did one sent to GIC on Monday.

Lafarge has been trying to sell its assets in India in the wake of its global merger since last year. The Competition Commission of India (CCI), the country’s antitrust regulator, had in April directed LafargeHolcim to divest Lafarge’s east India cement assets to allow for the merger between the local units of French cement maker Lafarge SA and Holcim of Switzerland.

Lafarge entered into a deal with Birla Corp. in August 2015 for its east India assets. The deal was called off on 2 February because of regulatory hurdles over the transfer of related mine leases. The global firm has now got CCI nod to sell Lafarge’s entire capacity in India. The deal is expected to be a highly contested one as it will provide a significant footprint to the new buyer and a stronghold in the eastern region, where cement prices have remained strong.

According to a research report by JP Morgan Securities (Asia Pacific) Ltd, cement asset valuations have not been cheap, ranging from Rs.8,000-10,000/tonne ($110-150/tonne), “and investment will yield ROCE (return on capital employed) of 6-8% at current levels (Ebitda/tonne of Rs.700). This is below the cost of financing and, hence, is earnings dilutive at the outset. Buyers seem to be calling for a sharp improvement in demand/pricing outlook for investments to make sense.”

The report further adds close to $4.5 billion worth of transactions have been announced since mid-2013.

The latest being UltraTech Cement Ltd’s deal to acquire Jaiprakash Associates Ltd’s 21.2 mt cement capacity for Rs.15,900 crore, concluded on 1 April. Before that, on 5 February, Birla Corp. agreed to buy 5.5 mt of cement capacity from Reliance Infrastructure Ltd for Rs.4,800 crore.

“Interest from PE (private equity) firms would be higher because, overall, they are comfortable with the sector and, second, if valuations are reasonable, they can expect good returns in the long term,” said Srinivas Tekal, director at investment banking firm O3 Capital Global Advisory Pvt. Ltd.