Another day, another slump sale of core business of a public listed firm. In a trend that has become distinct over the past two years where a public listed firm has sold its core business unit to another company, Kanoria Chemicals & Industries has sold its chloro chemicals division to Aditya Birla Chemicals (ABCIL), a subsidiary of metals giant Hindalco Industries for Rs 830 crore (~$ 190 million).
This division comprises manufacturing unit for chlor-alkalis, chlorine derivatives and water treatment located at Renukoot in Uttar Pradesh. It has annual capacity of 1.15 lakh tonnes and generated revenues of Rs 303 crore for the year ended March’10, almost three fourth of total sales and Rs 47 crore or almost 85% of Kanoria Chemicals’ operating profit.
Kanoria Chemicals retains the organic chemicals business making it a puny sized chemicals firm with loads of cash. SKP Securities of Kolkata advised Kanoria for the transaction that is expected to close by end of May.
RV Kanoria, CMD of Kanoria Chemicals, said that the funds raised from the asset sale would be used for expanding other existing businesses and for entry into new and related business through acquisitions. “The land and infrastructure available at our manufacturing facility at Visakhapatnam provides an immediate opportunity to expand and diversify our business,” he said.
The company’s other businesses includes its Ankleshwar based unit in Gujarat that is into alcohol and alcohol based intermediates besides a unit in Vishakhapatnam that is engaged in formaldehyde manufacturing and will soon enter the business of hexamine.
For diversified Aditya Birla Group, the transaction will more than double the caustic soda capacity under ABCIL. ABCIL has capacity to make 2.2 lakh tonne from 1.05 lakh tonne at present under its Rehla plant in Jharkhand. ABCIL will finance the deal through a mix of debt and internal accruals.
Kumar Mangalam Birla, Chairman, Aditya Birla Group, said the acquisition is a compelling strategic fit and strengthens the group's position as India’s largest player in the caustic soda/chlor-alkali business. Caustic soda is one of the essential inputs for the manufacture of alumina and fits in with backward linkage for Hindalco.
“Given the large expansion plans in our aluminium business, the deal serves as an excellent sourcing point. The business has potential for both growth in revenues and earnings,” he said.
The group will also be able to leverage its position in the caustic soda space by selling to other firms. Several new alumina manufacturing facilities are being set up in the eastern region, providing significant growth opportunities in addition to growing demand for other chlorine derivatives.
DEAL VALUATION MATH
The acquirers are paying almost 18 times EBITDA for the business. This is more than double the valuation multiple enjoyed by market leader in the caustic soda space, Gujarat Alkalies & Chemicals Ltd, that is currently trading just around 8 times its operating profit for 2009-10. ABCIL itself is valued just 3.5 times its operating profit for FY’10.
The deal has already lifted other players in the sector with Gujarat Alkalies scrip up over 5% in early morning trade Sree Rayalaseema Alkalies & Allied Chemicals share price up 11.5%, Punjab Alkalies’ scrip up 3.5% and ABCIL’s own scrip up 6%.
The transaction also puts a substantial premium to what investors valued Kanoria Chemicals itself. Kanoria Chemicals scrip hit the upper circuit for the day, shooting up 20% to Rs 49.35, valuing the firm at Rs 277 crore, or a fraction of what it would encash by selling its core business.
ASSET SALE STRATEGY
While valuation of Kanoria Chemicals has got a leg up post the transaction, it needs to be seen how long before the scrip crumbles. Selling the main business of a public listed firm has become a distinct trend in the recent past, a strategy that keeps some business of the firm into the company to allow the promoters to remain at the helm and takes away the trouble of making an open offer for the acquirers.
In the most recent such deal, French electrical equipment giant Schneider struck a deal with Smartlink Network Systems Ltd to acquire its structured cabling systems business Digilink for Rs 503 crore(~$115 million).
There are many other such examples including Piramal Healthcare-Abbott, Indo Asian Fusegear-Legrand and Schneider-Zicom. Most of such firms selling assets that contribute a large chunk of revenues have seen their share price shrink soon after announcing such transactions. Investors question what does it leave the sellers shareholders with.