In talks with Star Cement; deal size may be Rs 1,000-1,200 crore.
Lafarge India is in talks with the promoters of Meghalaya-based Star Cement for a majority stake in the company. This is a part of the French cement major’s move to step up its operations in the east.
Sources familiar with the developments said, talks between the two have progressed to a due diligence stage. While a deal at $120-$130/tonne valuation seems plausible, the promoters are said to be looking at a considerable premium of $200/tonne. The final deal size, inclusive of debt, could be $250- $275 million ( Rs 1,000- Rs 1,200 crore).
YES Bank is believed to be advising Lafarge, while the promoters of Star Cement have appointed Morgan Stanley to help them explore strategic options, including finding a partner for an eventual selloff.
Last week, Lafarge, which was finding it difficult to scale up in India, finally had reason to cheer. After waiting for a year-and-a-half, the Supreme Court finally approved of the company’s plans for limestone mining in Meghalaya. This will help them take care of raw material requirements for their $250-million Bangladesh venture Surma Cements, which has so far been hamstrung and suffering heavy financial losses.
Star Cement is a popular brand of Cement Manufacturing Company Ltd (CMCL). Its parent, however, is known more for its flagship plywood products, which sell under the “Centuryply” brand.
CMCL, which is a 70.48 per cent subsidiary of Century Plyboards, is the largest cement player in the Northeast, with a capacity of 1.2 million tonnes (mt) in Meghalaya. But it is adding another 3.2 million tonnes grinding capacity in Assam and Bihar. Once completed, this is expected to take up the total capacity to 4.4 mt by the end of 2012. The existing clinker facilities in the Northeast are also getting expanded and Meghalaya alone will have a 1.75-million tonne clinker capacity.
When contacted, Sajjan Bhajanka, chairman of CMCL and Managing Director of Century Plyboards told Business Standard, “I cannot comment on specifics. We are expanding our grinding capacity in the east and so we would need funds and are open to partnerships. We may divest up to 15-20 per cent stake to strategic partners, but we are unlikely to sell out entirely.”
A Lafarge spokesperson refused to comment, but said, “The eastern market has been a favorable prospect for us. We look at value added organic and inorganic opportunities that offer us a strategic fit.”
But cement sector analysts say this deal signifies a bigger structural change. The eastern markets, including the seven Northeast sisters and Bangladesh are fast becoming a strategic hub for the entire cement play in the country and the neighborhood. And for players like Lafarge, which has so far seen muted growth in India after its big bang debut in 1999, it is becoming critical to scale up.
Analysts say, of the total 300 mt Indian cement market, the eastern region has a total capacity of 40 million tonne at the end of FY11 and only 2 million tonnes were added last year. The cement consumption for the region was at 36.5 million tonne in FY11.
Cement units in North East also enjoy tax breaks and subsidies ranging from excise, sales tax, income tax exemptions, and transport subsidies to incentivize industrial growth in the region. So despite a long monsoon season, where demand plummets, North East has considerable attractions.
Sources said, other than Lafarge, a few other strategic players like the Aditya Birla Group, Holcim and Dalmia Cements have also been approached as most of them have been eyeing the market for a while and planning either greenfield or brownfield expansions. But talks with Lafarge, according to sources, have progressed the most.
Lafarge entered India via acquisitions buying the cement business of Tata Steel. It was followed by the purchase of the Raymond Cement facility in 2001. Since then its expansion has been moderate. Its global peers like Swiss major Holcim, which entered India much later, have left the French player way behind in total cement capacities.
Lafarge currently has a 3 million tonne clinker and a 6.55 million tonne cement capacity from its four cement plants in India. Two of its integrated plants in Chhattisgarh , while one grinding station each in Jharkhand & West Bengal. It is also present locally in its other businesses like aggregates and concrete and gypsum plasterboard. After its acquisition of L&T’s Ready-mix Concrete business in 2008, Lafarge it became the market leader in the segment and currently has around 78 plants across the country.
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