What is wrong with the Renuka Sugars-Wilmar deal?

Besides the acquisition price, the fact that it has ceded operating freedom will affect it in the long term

Shree Renuka Sugars' deal with Wilmar International Ltd has two main issues that is hurting the share price. First is the price at which Wilmar is buying a 27.5% stake in Renuka Sugars. The acquisition price of Rs 20.08 was lower than the market price of Renuka Sugars on Thursday when it closed at Rs 22.5. An open offer at lower than the market price would naturally hurt the sentiment of the stock.

However, it is the second issue which will have a longer term impact on the company’s stock as well as financial performance. Had Renuka Sugars raised the $200 million from a financial investor, there would have been little problem. But Wilmar International is a completely different ball game.

Wilmar International is ranked amongst the largest listed companies in terms of market capitalisation on the Singapore Stock Exchange. It is the largest producer of palm oil in the world and along with Renuka Sugars is among the top 10 sugar producers in the world. With a turnover of nearly $45 billion, it completely overshadows Renuka Sugars' $1.8 billion sales.

In terms of the sugar business, Wilmar has major stakes in the sugar business globally, including Australia (largest in the country), New Zealand and Indonesia with a total cane crushing capacity of 17 million tonne and 1.9 million tonne of sugar refining capacity. Renuka Sugars on the other hand has presence in India and Brazil with 20.7 million tonne crushing capacity and 1.7 million tonne refining capacity.

Purely in terms of sugar business, Renuka Sugars is bigger than Wilmar, however, its precarious financial position has resulted in the company management conceding its freedom to operate. A financial investor would have towed the line Renuka Sugar management wanted it to, but with Wilmar sitting in the co-pilot seat, it would be difficult if not impossible for Renuka Sugars to expand without hampering Wilmar’s plan.

For Wilmar, Renuka Sugar allows it to establish its foot print across the world. Being on the Eastern side of the globe, Wilmar’s revenue from sugar business comes in the last two quarters of the calendar year. But with Renuka Sugars under its belt, it can show revenues from sugar for the entire year (India 1st & 4th quarter and Brazil 2nd and 3rd quarter). Further Wilmar through Renuka Sugars gets an entry into India – the world’s largest sugar consumer.

The only short term advantage Renuka Sugar has is that it will bring down its mountain of debt of Rs 8,848 by Rs 1,200 crore. This, however, will not be sufficient to make the company profitable, given the supressed sugar sector cycle and its own high level of interest outgo and depreciation.

Known as the fastest kid on the block, Renuka Sugars beat every other Indian sugar producer till 2007. But then it committed a big mistake. It acquired two Brazilian units financed largely through debt. Strategically it was a good move to expand its global footprint except for the pricing part. Renuka Sugars bought the mills when the sugar cycle was near its peak like every other asset class in 2007. The acquisition was made when sugar was trading between $650-700 a tonne a price which it has never touched since then.

Renuka Sugars committed the two cardinal sins of investment banking. It bought assets at the peak of the commodity cycle and sold its stake at the bottom of the cycle. Its shareholders are now paying the price.