The Birla group has floated a special purpose vehicle (SPV) called Indigold domiciled in Netherlands to acquire the world’s third largest producer of carbon black - Columbian Chemicals Company in a $875 million deal. The Birlas are investing a sum of $425 million as equity and debt in the SPV, to help fund the takeover of the loss- making company from private equity firm One Equity Partners.
“Thai Carbon Black listed on the Bangkok Stock Exchange and Alexandria Carbon Black a joint venture company in Egypt will each be raising $175 million as dollar denominated term loans with a weighted average maturity of 5.8 years to invest as equity in Indigold and advance loans to the SPV. In addition SKI Investment, a Singapore based, privately held group company will raise $75 million to invest as equity in Indigold,” a top Birla group official told Financial Chronicle. The break up of equity and debt contribution of Thai Carbon Black (TCP), Alexandria Carbon Black (ACP) and SKI will be such that ultimately SKI will own 58 per cent of Indigold while TCP and ACP get a 21 per cent stake each.
“SKI will also be standing guarantor to the $450 million term loan being raised against the balance sheet of Columbian” said another top Aditya Birla group official. In other words the loan being raised on the target company’s balance sheet will not be a non-recourse loan for lenders led by ANZ, Bank of America, HSBC, The Royal Bank of Scotland and Standard Chartered Bank.
While the completely debt-funded deal will have a weighted average maturity of 5.8 years for the dollar- denominated debt, the interest rates for the loans to the four entities will differ. “This is because the banks will factor in the balance sheet size of each company and the country risk for the jurisdiction they are domiciled in,” said the Birla group official. Since SKI will be taking the maximum debt risk in the transaction, it will also enjoy the majority ownership of the asset that catapults the Aditya Birla group from number four in the world to number one producer of the key raw material that, goes into making tyres and gives them their distinctive black colour and body.
“The debt to be raised by each of the four entities funding the takeover will help all the legal entities minimise the tax outgo on profits earned as interest on loans is a tax deductible expense,” another top Birla group official added.
“All in all we estimate that the loans will carry an interest rate of between 5.25-5.5 per cent per annum,” said the official. While the group with a combined capacity of 2.01 million tonnes per annum (mtpa) will be the world leader by capacity ahead of the current number one Massachusetts- based Cabot Corporation which had a carbon black capacity of 1.94 mtpa, it will not be the largest by value of sales. “This is because Georgia, USA based Colombian manufactured around 8.5 lakh tonnes per annum of carbon black (lower than its rated capacity) in response to a global oversupply of the product,” said the top Birla group official.
In a presentation in Mumbai on Monday, Santrupt B Misra CEO, carbon black business at Aditya Birla group said that while the global capacity for carbon black was 14.26 mtpa, demand stood at 10.3 mtpa. “In such a scenario it makes sense to acquire capacity rather than build new Greenfield capacity which will pressure markets,” said Misra. He expects that the company, which had sales of around a billion dollars in 2010 and an operating profit of $ 140 million, would be turned around in the current year itself.
“We expect that this transaction which will close in six months, will be accretive from the first year itself. It will generate annual synergy benefits of between $30-50 million per annum for the carbon black business. Our forte is to run very efficient plants while Columbian has very high-end state of the art technology. Together we can ensure lower prices to consumers and better margins for us by transfer of high-end technology for specialty products. It will make us the last man standing in the business even if there were a downturn,” said Kumar Mangalam Birla, chairman at Aditya Birla group. The group will have to seek anti trust approval for the transaction after which it will reconstitute the board of Columbian to include its nominees.
Birla also said that the group would no longer be pursuing the acquisition of the current world number two - the 1.35 mtpa Evonik, which is currently on the block. “The Colombian acquisition is priced in the range of six to seven times EBITDA similar to other transactions. This was a bilateral deal that took 15 months to complete and is an asset that has been knocked into shape by their current owners,” said Birla.
The current transaction comes almost four years after Birla, chairman of the $29 billion retail to telecom group, acquired loss making Canadian aluminium major Novelis at an enterprise value of around $ six billion. That acquisition, which was made by the NSE-listed Hindalco, saw the stock price of the Indian company being pummelled as investors questioned the logic of buying an asset in a slow growing economy. Experts said this is the reason the group has not involved its NSE-listed flagship Aditya Birla Nuvo in funding this deal which basically gives the group presence in the large but slow growing North American and European markets it so far has been absent in. In contrast shares of TCP rose 3.2 per cent to 32.75 Thai Baht, its biggest gain in almost three months.
“Nuvo has its own expansion and growth plans with expansion at Patalganga and two more sites. This didn’t fit in with Nuvo’s carbon black plans as Nuvo will stay focussed on India,” said Birla. Nuvo though its arm Hi-Tech Carbon accounts for 3.46 lakh tonnes per annum or a little over a third of the Birla groups global carbon black capacity.
“We look upon the carbon black business as a core business that has a strong growth potential both in terms of revenues and earnings. This acquisition is in keeping with our objective of being a dominant player that is among the top three leader in every business that the group operates in. The Aditya Birla Group’s Carbon Black business and that of Columbian Chemicals complement each other. This acquisition will create a business which will have the advantage of cutting edge technology and low costs, and will have a truly global footprint,” said Birla. He said Columbian had a very strong customer franchise with the largest tyre makers globally and this would help the Birlas access a wider customer base as getting accreditation as a vendor to these quality names is a lengthy process.
Columbian which operates in 11 countries gives the group a presence in North America, Canada, Brazil, Germany, Italy, Spain and Hungary markets in which the Birlas carbon black business is not present. “The acquisition of Columbian, is a perfect fit for Birla Carbon. Their assets and the expertise of the team will provide a stronger platform for higher growth and ongoing success,” Birla said in a statement.
