24 buyouts in 15 years — 3 in the last 4 months. Business Standard reads the rationale of AV Birla Group’s buying spree
Patience is a virtue. Be it in golf or high-voltage stakes of M&As. And Dev Bhattacharya, Aditya Birla Group’s executive president for corporate strategy and business development, is as passionate about his birdie as transformational deals.
So, when one is relentlessly pursuing opportunities, this golf and deal-making co-relation always comes in handy for his entire team. “The operating companies are constantly doing market recces. The strategy teams conceive and develop ideas, zero in on assets and create a deal,” says Bhattacharya, emphasising on the collective efforts.
Would you believe it then that Bhattacharya and his colleagues from the Carbon Black business team were actually “tracking and pursuing” Columbian Chemicals for almost ten years, before snapping it up for $875 million in February this year.
But, when a “good property” like Domsjo Fabricare AB “became available in the market”, it took just 60 days to move in, negotiate, sign an exclusivity contract and scoop it up for $340 million. Even as pulp prices have rallied to record highs, cutting-edge specialty pulp maker and bio-refiner Domsjo looked attractive, because it would help the group gain control over inputs for the Viscose Staple Fibre (VSF) business. Dissolving grade pulp is used to manufacture VSF, which is a substitute to cotton or synthetic fibres in the textile business.
The AV Birla group has always been actively involved in acquisitions. It has been part of its strategy to secure raw materials, market access, share or new technology. “I ascribe the group’s M&A thrust to Kumar Mangalam’s desire to grow fast, dominate certain segments and fill key gaps in the value chain,” says Amit Chandra, managing director of Bain Capital, who has earlier witnessed the group’s transformation from close quarters as the head of investment banking at DSP Merrill Lynch.
There have been 24 buyouts in 15 years with Kumar Mangalam Birla at the helm. Enough to set the record straight.
But it’s been especially frenetic in the last few months. Just last month, the group hit the headlines with two acquisitions within the space of just three days. First Aditya Birla Chemicals bought the chloro-chemicals unit of Kanoria Chemicals and Industries for Rs 830 crore in an all-cash deal and then came the announcement of the Domsjo acquisition. All this within just two months of the group signing up for Columbian Chemicals.
| THE SHOPPING CART |
| 2000 |
| * Hindalco acquires Indal for $200 million |
| * Indian Rayon acquires Madura Garments and overseas brand rights of Allen Solly, Louis Phillipe, Peter England, Van Heusen. |
| * Merger of Birla AT&T and Tata Cellular (BATATA) |
|
2001 |
2011
And you thought they were slow and conservative?
The shy demeanor and measured risk taking belie the quiet confidence of Kumar Mangalam Birla. In many ways, he has taken far bolder decisions than many of his peers. He eschews unbridled growth, but in sheer scale of operations, he has few parallels.
Frankly, if you grow 15 times in as many years — from a $2-billion to a $30-billion conglomerate — nobody cares even if you are an introvert.
But, the group’s target now is to double its revenues to $65 billion by 2015. That means the unfinished agenda is equally daunting.
His father’s son
In many ways, Kumar Birla is carrying on his father’s legacy. Aditya Vikram Birla, the group’s patriarch, was the pioneer who broke away from the shackles of the licence raj and took the first steps towards making the group a multinational corporation way back in the late 70s and 80s.
“Globalisation as a theme is gaining momentum and internationalisation of business has become an integral part of that. It’s also important from the point of view of geographical derisking,” says Kumar Mangalam Birla, the group’s chairman. Already 60 per cent of the group’s turnover comes from outside India.
Over time, Kumar Birla’s overseas buyout bets have also become riskier and more complex. In 2007, the $2.6-billion Hindalco was game to buy the $11-billion Novelis. Columbian Chemicals, too, is more than three times the size of Birla’s carbon black division in India. But, if it’s strategic, there is no shying away.
It, of course, helped that Novelis — until recently panned by analysts as Birla’s costliest mistake ever — has seen a remarkable turnaround and has given its best performance ever. That way, it’s been a confidence booster for the group, giving it enough muscle to seal other cross-border deals. “I am sure the psychology is more positive. But each business has to follow its own trajectory of growth,” Birla says.
Big is beautiful
A global scale of operations dovetails perfectly with such transformational efforts. The mantra is universal: Be among the top, preferably among the top three. And, in a portfolio that has a judicious mix of asset-heavy, old economy companies, along with nimbler, lighter, services sector ones, most have made or are in the process of making the cut.
For example, after restructuring and the acquisition of Star Cement in UAE, Ultratech Cement, at 52 million tonnes, has exceeded rival ACC to be the largest in India and the eighth in the world. Cement is a localised business, but, using Star, the group is tapping into the Gulf and the neighbouring South Asian markets. Hindalco ranks among the global top-five aluminium majors, with 33 plants in 13 countries.
In VSF, Grasim, combined with its overseas arms, is the world beater. And, after Columbian Chemicals, the group has become one of the largest carbon black makers globally. Idea Cellular, too, is already the third-largest GSM operator in India and is growing. In financial services and insurance also, the group figures among the country’s top five.
But acquisitions do not mean forfeiting the organic growth strategy in the home or existing global markets. Hindalco, Hi-Tech Carbon, Ultratech, Grasim or even Aditya Birla Chemicals are all expanding their greenfield capacities at an unprecedented speed among their domestic peers. “But, for technology, market and a wider product access, or to secure our raw material supply, if we get a good asset even in the US or Europe or other developed markets, we will not shy away from a deal,” Bhattacharya explains.
Interestingly, this geographical spread also underlines a subtle change in the group’s strategy. Unlike the past, it’s not just the emerging markets of Southeast Asia that are the hunting ground. Today, West Asia, Latin America and Africa are as strategic hotspots as the developed markets of Europe and the US.
In most of its critical sectors, the group’s market share in India is very strong. “It doesn’t make sense to be overweight in one place. So, going forward, I think we will see more greenfield expansions in India, and inorganic buys overseas,” says Bhattacharya.
Why & what to shop?
An overwhelming 70 per cent of the AV Birla group portfolio is linked to natural resources. So, now that there is a global scramble to corner such assets, it is difficult to cherry-pick them. For example, the group’s cement and metals divisions are coal-guzzlers. So it is now exploring to buy coal assets overseas. But even then, it is staying away from expensive bids or auctions.
Strategic access to new high-growth markets and technology, right when the global auto sector was turning around, was intrinsic to the Columbian buy. A by-product of crude oil refining, carbon black is the key raw material for making tyres. “We will now get access to markets like North and South Americas, Brazil, Europe (Germany, Hungary, Spain), and Korea. We will also get a complimentary footprint in China. This completes the global footprint for us,” Sanrupt Misra, CEO, Birla Carbon, had said after the acquisition.
In an equally well-timed move, Hindalco’s arm, Aditya Birla Chemicals, picked up one of Kanoria’s chemical divisions, paying top dollars, to emerge as the largest manufacturer of caustic soda in the country.
Four years and an amazing financial and operational integration later, Hindalco and Novelis today represent a rare convergence of all strategic needs. If Hindalco is the low-cost producer and convertor of primary aluminium and copper, Novelis is the value-added maker for beverage cans, auto and electronic parts, with marquee clients like Coca-Cola, General Motors ThyssenKrup and its own brand equity to boot. Together, they provide a natural hedge against aluminium volatility like never before.
Building scale through JVs and acquisitions is predominant in the group’s telecom journey in the past 16 years. First, Birla-AT&T in 1995, Tatas coming on board five years later only to exit six years after that. On the way came RPG Cellular, RPG Telecom and Escotel buyouts and, and the Spice Communications merger in 2008, to widen Idea’s national footprint. Idea today is the fourth most-valuable group company with a market cap of Rs 21,619 crore.
Newer businesses — retail and financials — have also seen their share of nimble buyouts like Trinethra or Apollo Sinduri, either as an entry strategy or as a route to market.
Cash management
Unlike many, the group emphasises a lot more on the visibility of free cash flows for making decisions on investments and growth. “Mr Birla takes a long-term view. He doesn’t fret about immediate market cap. On the one hand, he does have a strong focus on cash flows, and on the other, he doesn’t believe in multiples-driven or capital-markets-driven value creation,” observes Sumant Sinha, Birla’s former finance head, who had overseen three mega group acquisitions — Ultratech Cement, Idea Cellular and Novelis. Sinha currently chairs Savant Advisors and cleantech venture ReNew Power.
It is beyond doubt that the group has been riding the commodity cycle. But, interestingly, it does not see being overweight on commodities as a risk. “All businesses are cyclical. But we have historically weathered most downturns by managing costs, capacity planning and continuous growth,” quips Bhattacharya. For Kumar Birla, being the lowest cost producer means his companies will be “last man standing” during any down cycles.
“Having diversification through counter-cyclical commodities can itself be valuable from a derisking perspective,” adds Bain Capital’s Chandra.
Even then, Sinha says there is a conscious effort to move away from pure commodities to value-added products. “I see that in aluminium, carbon black and pulp. The focus is not on prospecting or mining of metals anymore. Conversion has become integral. And then you integrate backwards and control costs,” he says.
Most Birla watchers expect the road to further globalisation would mean big-bang cross-border buys in cement, VSF and chemicals space. It may not always be the bulge-bracket variety, but strategic in market access, technology and branding. However, if there is no growth or value accretion, the mandate is clear. There will be divestments after portfolio reviews, like plantations, oil refining, sponge iron or even power in the past.
Birla surely will keep the bankers busy.
