The merger of the cement businesses of the Aditya Birla Group will create the world’s 10th largest cement maker and also India’s largest. Chairman Kumar Mangalam Birla says Grasim will be the promoter firm for the combined entity, with 55-65 per cent stake, and later look for creeping acquisition to increase the promoter holding. Birla also spoke about plans for the group’s other companies, Aditya Birla Nuvo, Aditya Birla Financial Services and Hindalco. Excerpts:
What is the objective of the restructuring?
The objective is to create one legal entity. For long, investors have been asking which entity would grow more than the other. The decision to merge amplifies our concern for investor interest.
On what basis have you planned the restructuring?
It has been planned on three parameters. First, Grasim’s direct share holding in UltraTech should only enhance. Second, Grasim’s parentage should remain intact. Third, it will help achieve financial flexibilities to support a higher rate of growth for the company. Grasim would now focus on the viscose staple fibre (VSF) and cement business. The company recently invested Rs 1,000 crore to add an additional 25 per cent capacity for VSF production. The cash flow from Grasim will remain intact for the growth of VSF and cement businesses.
The market has reacted adversely on concerns about the holding company discount.
The restructuring will significantly help us to re-rate our companies. Whatever holding company discount is being applied on Grasim’s valuation will be made up by the cement business valuation. Grasim will not be a traditional holding company, as it will continue to grow its VSF business. The enterprise value of UltraTech is $110 per tonne, compared to $160 of Shree Cements and $160 of ACC. After the deal, the enterprise value of UltraTech will go up substantially.
After the merger, what would be the position of the combined entity?
The restructuring will make the new cement company the largest in the country and the 10th largest in the world. The Grasim shareholders’ economic interest also remains unchanged. The UltraTech board has given in-principal approval for the merger. It has also appointed Bansi S Mehta and Co as the valuer and UBS as the investment banker. The deal will be completed in nine months.
What would be the identity of the new entity?
We will retain the UltraTech brand for the new company after the restructuring. This is the brand under which most of our products are sold. So, it makes sense to retain the brand.
What will be the promoters’ holding in the combined entity?
Promoter firm Grasim will hold 55-65 per cent stake in the new company. Also, we are looking for creeping acquisitions in the company, like in other group companies.
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Can you explain the synergy benefits from the merger?
The synergy of the businesses of these two cement companies has already arrived. The back-end operations were already combined. So, we are not expecting any further benefits.
Do you have an investment plan for the company? Are you also looking at inorganic growth?
The new cement maker would look at value accretive propositions and is open to inorganic growth. In the next five years, about $3 billion investment would be required for capacity addition of about 25 million tonnes per annum. Grasim has no plans to add any other business apart from the VSF. It would continue to invest in the new cement company. It can acquire additional equity through rights issue to fund the expansion plans of the new firm.
Moving away from the Grasim deal, are you planning to bring in a strategic investor for Aditya Birla Financial Services?
We already have a solid strategic investor in Sun Life. We are not averse to bringing in a cash investor at the appropriate time.
What about Aditya Birla Nuvo?
It’s now the only conglomerate in the group. We are open to value-accretive options in the future.
When will Hindalco turn around?
Shortly. Things are looking up and I expect a big turnaround soon.
Is Novelis still a big drag for Hindalco?
The environment is much better now. But things don’t happen overnight. Investors would see a big improvement in Novelis’ performance very soon. The process has already started.