The acquisition of total 27.19 crore shares in Andhra Cements by Jaypee Development Corporation — an associate firm of Gaur family-promoted Jaiprakash Associates(JPA) — has not augured well with the investors.
After the all-cash deal Andhra Cements will walk away with close to Rs 326.32 crore. Jaypee Group will pay Rs 12 per share for this transaction, which includes a controlling stake of 32.95 per cent, a proposed preferential allotment and an open offer payment which will trigger after the acquisition of the first block of shares.
According to analysts, this deal could become achillies heels for the North-based company unless there is clarity on the rational for this acquisition by JPA.
Jaypee Group has valued Andhra Cements at $115 enterprise valuation per tonne, a stark contrast to what other cement manufacturers were willing to pay which was close to $75-90 ev per tonne.
The deal does not specify if it includes the additional capacity that Andhra Cements was planning to add to its existing capacity of 1.4 million tonne per annum(mtpa). They were looking to expand to 3.5 mtpa, though sources confirm that Andhra Cements has not placed any equipment order for its plants. It effectively means JPC will have to start from the scratch to start operations in this unit.
A lot of questions have gone unanswered for investors as the deal fructifies in the corridors of Jaypee's New Delhi office.
According to an analyst with a foreign brokerage, "JPA has not clarified to its investors why it bought the company and put the acquisition burden on an associate company and not on the cement specific company, Jaypee Cement." Jaypee Cement, the third largest cement venture in the country, is the highest levered cement manufacturer. Its debt on the books is a humongous Rs 11,500 crore by the end of March 2011.
Since cement oversupply has hit the country, Andhra Pradesh has been the worst hit state with an oversupply capacity of 15 mtpa in the state.
Analysts also question that the deal does not clarify if the debt raised by Andhra Cements consists of any capital commitment for its brown field expansion or merely the company's existing loans which will show on JPC's books. The AP-based company has a debt burden of Rs 438 crore and an enterprise valuation of Rs 787.8 crore.
Andhra Cements, has been looking for a buyer since last five years, but none of the talks fructified as it was looking for a handsome valuation. Also the cement manufacturer has stopped production since financial year 2011.
On November 14, JPA had announced that it will demerge company's cement plants in Gujarat and Andhra Pradesh into its wholly owned subsidiary, Jaypee Cement Corporation Limited (JCCL) implementing 3 million tonne per annum (mtpa) cement plant in Karnataka.
An analyst tracking the company said, “The parent company had decided to hive off the AP and Gujarat plants in the run up to the divestment of its stake to a private equity group which was considered to be a positive move. And on the other hand it has gone ahead and bought controlling stake in a company which is based in Andhra Pradesh which is the most vulnerable state for cement production and that too a company which has shut down its production in FY11. It has sent very negative signal to the investors of the company.”
Last month, National Stock Exchange (NSE), has suspended the trading of shares of Andhra Cements due to non-compliance with listing agreement provisions.
At the end of the day shares of JPA fell by 4.49 per cent to Rs 67.05 per share whereas stocks of Andhra Cements went up by 4.97 per cent to close at Rs 10.98 per share.
The average amount paid for deals between 2005 and 2008 was around $168 per tonne as against $121 per tonne a decade before.
JPA's cement production has increased to 14.71 million tonne in 2010-11 as compared to 10.69 million tonne in 2009-10, a jump of 37.6 per cent. It is on a major expansion drive of increasing its capacity to total 35.5 million tonne by the end of this financial year.
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