The over Rs 50,000-crore diversified Shriram Group is entering the cement industry by acquiring a majority stake in Andhra Pradesh-based cement manufacturer Sree Jayajothi Cements Limited (SJJC) by converting part of its outstanding dues into equity. This would perhaps be the first time a vendor would seize control of a company for delayed repayment.
In May, 2009, Bharati Shipyard took over Great Offshore in a similar situation when it acquired the pledged shares of the latter’s Vice Chairman and Managing Director Vijay Sheth, amounting to 14.89 per cent of the company, for Rs 174 crore.
T Shivaraman, MD & chief executive officer, Shriram EPC, said, “Sree Jayajothi had a large outstanding with us and we had an option of converting part of that outstanding amount into equity, if they delayed the payment beyond a point. Since they have been delaying the payment for a long time now, we decided to convert the outstanding to equity. The dues are mainly receivables on an EPC contract.”
He said of the total outstanding amount of around Rs 500 crore, the convertible part would be around Rs 300 crore. It is still not clear upon conversion what the quantum of shares under Shriram Group’s control would be, but it will grab the majority control from the existing promoters. The quantum will become clear in a week’s time after a scheduled board meeting.
The acquisition will be done through Shriram EPC and other Shriram Group companies. Shriram Group will subsequently rope in a strategic European partner. Even though the company would not reveal its identity, sources close to the development said Portugal’s Cimpor, the world’s ninth largest cement maker, is the front runner.
Independent to the Shriram transaction, Cimpor had already been negotiating with the promoters of Jayajothi to acquire 51 per cent stake in the Rajapalayam-based group at an estimated valuation of Rs 1,800 crore. That would have been Cimpor’s second acquisition in four years. It entered India after buying Shree Digvijay Cement from Grasim in 2008.
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Jayajothi Cements is part of the diversified Jayajothi Group of Tamil Nadu. Set up in 2006, the company has a 3.2 million tonnes per annum (mtpa) greenfield cement plant and a two million tonne per annum clinker facility in Kurnool district in Andhra Pradesh.
Sree Jayajothi’s limestone reserves — sufficient for its capacity and future expansion — are also in the same district. It has three limestone mines in various stages of getting ministerial and environmental clearances.
Despite repeated attempts, Jayajothi Cements Managing Director T R Kannan, also the group promoter, was unavailable for comments. Even though textiles is his group’s main business, the business activities are spread across cement, transportation, education and even power and energy management. Cement has been a relatively new foray.
For Shriram Group, known for its NBFC, EPC, real estate, IT services and retail businesses, this will be a new area of diversification. “Yes, in a way, it is a foray for the group into cement industry,” said Shivaraman and added, “A European strategic investor was planning to invest in Jayajothi, but they have been delaying it for various reasons. Considering we have a good track record, that will also happen now.”
Shivaraman said if required it could tap private equity investors to raise additional funds. “We are in discussions with private equity and strategic investors. All this will materialise once we complete the paper work of the acquisition, which will take another month.”
Jayajothi’s lenders, too, have not opposed the move as Shriram is a bigger and bankable stakeholder for them. A senior team from Shriram Group will meet the lender consortium next week to thrash out the financial contours for restructuring the company. After the takeover happens, banks have agreed to infuse additional work capital loans.