ACC–JPA cement deal: Does the acquisition makes sense?

The cement industry has seen a number of large mergers and acquisitions in recent years as industry leaders are taking both the organic and inorganic route to solidify their market presence. LafargeHolcim-controlled ACC is the latest to join the fray as the company is planning to buy residual cement business Jaiprakash Associates (JPA). The deal is expected to close at the end of Q2 FY19. Jaypee Group, the parent company of JPA, is facing insolvency proceedings and monetising its assets with an aim to pare its debt.

Plethora of deals in the past

In 2016, Dalmia Bharat merged with OCL (formerly Orissa Cement) to form the fourth largest cement maker in the country with an installed capacity of 25 million tonne per annum (mtpa). Besides this, Dalmia Bharat is the final stages of acquiring 2 National Company Law Tribunal companies: Murli Industries (Maharashtra) and Kalyanpur Cement (Bihar).

UltraTech Cement like Dalmia Bharat has been on an acquisition hunt in recent past. In mid-2017, it acquired JPA’s cement plants (spanning 5 states) with a capacity of 21.2 mtpa for around Rs 16,500 crore. In May, it announced the acquisition of cement assets (11.4 mtpa integrated capacity and 2 mtpa grinding unit) of Century Textiles and Industries through a share swap agreement, thereby taking its overall capacity to over 100 mtpa.

Both UltraTech and Dalmia are actively contesting the acquisition of Rajasthan-based Binani Cement, which has a capacity of around 11 mtpa.

Ambuja Cements was contemplating a merger with its subsidiary ACC, which was called-off earlier this year. It had instead entered into a master supply agreement (MSA) with ACC, which would be synergetic for both companies. The MSA would allow these companies to procure clinker, cement and raw materials from each other as well as use spare capacities on mutually agreed terms.

JPA is now planning to sell its residual cement business, with a capacity of 5.5 mtpa, for about Rs 5,200 crore. This deal comes after OCL terminated its agreement with Jaypee Group to acquire Nigrie grinding unit and Bhilai Jaypee Cements located in Madhya Pradesh.

In May last year, the Jaypee Group had agreed to sell a part of its central capacity to OCL for Rs 1,946 crore but the transaction fell through as the closing could not be completed within the stipulated timeframe of 12 months.

The ACC-JPA deal value is pegged at around Rs 5,200 crore for a cement capacity of 5.5 mtpa. This translates in an enterprise value per tonne of $139, which seems on the higher side compared to the recent acquisitions in the sector.

The UltraTech-JPA deal, which closed last year, was valued much lower at $102 per tonne. The pending-NCLT Binani Cement resolution is also expected to be valued at an EV/tonne of $114. The deal value should also be seen in conjunction with the latest capacity expansion of UltraTech as it commissioned a greenfield clinker capacity of 2.5 mtpa (cement capacity of 3.5 mtpa) at Dhar, Madhya Pradesh in less than a year, under $90 MT.

While the deal should help Jaypee Group reduce its outstanding debt, the acquisition by ACC should help strengthen company’s presence in the central region as it will more than double its cement capacity in that region, which currently stands around 4.5 mtpa.

ACC operates in the central region though an integrated unit in Kymore (MP) and grinding unit in Tikaria (UP). Ramp-up of JPA capacity would add to supplies in the central region, which is witnessing strong demand and firm prices.

Besides gaining market presence, the deal should help ACC gain economies of scale. However, how much of an operating efficiency gains result from the deal remains to be seen as the company lags behind its peers in terms of operating margin. From the business perspective, ACC seems to be gaining a lot of positives but the company is definitely paying a premium for the same.