merger - samrudhhi cement & ultratech

7/24/2019 Merger - Samrudhhi Cement & Ultratech

1/27

Merger of Samruddhi Cement with

UltraTech Cement

Date of Announcement of Deal: 15-11-2009

Date of Merger: 01-07-2010

Merger Entities: UltraTech(Acquirer) and Samruddhi(Target)

Deal Value: $826.44 Million

Nature of the Merger: All stock deal, Consolidation

Industry: Cement Industry

Chandan Gupta | PGP28086

Geete Sagar | PGP28083

Rajya Lakshmi | PGP28111Deekshita Bhist | PGP28199

Neeharika Velavarthy | PGP220

Meghana Katiki | PGP28230

Piyush Chowdhary | PGP28337

Section B | Group 5


2/27

Contents

Industry Overview

Porters 5 Forces Cement Industry VRIOAnalysis

Value Chain Analysis

Corporate Strategies followed by Target

Merger Motives

Due Diligence

Deal Structuring

Market Reaction

SDC Data Analysis

Unique Aspects


3/27

Industry Overview

2nd largest cement

producer and

consumer (world)

Production of cement in India was nearly 250 Mn

tonnes in FY2012, next only to China

Comprises 183 large and 356 mini cement plants

High growth rate

Production CAGR of 10% registered over FY06-FY13

Immense momentum in capacity addition driven by

growth in construction and infrastructure industry

Fragmented industry

with concentration in

geographic regions

Over 100 players present in the cement industry

Players are concentrated share-wise in the regions

that they are present in

C

t

c

a

S

e

F

o

s

C

Location

Consolidation

Distribution

Operating

efficiencies

Cement is a bulky and commodity-like product.

The cement industry is cyclical in nature; growth is

hampered and spurred in turn by the construction an

infrastructure industry

The cement industry is sensitive to legal and public

actions due to the environmentally-unfriendly nature

its processes

34%

53%

13%

Market Sha

Pan-India Regiona


4/27

Porters 5 Forces Cement Industry

arriers to Entry HIGH

High investments, significant

economies of scale, immensedistribution requirements

Threat of rivalry MEDIUM

Few firms in each region.

However, commoditized nature ofproduct ensures limited inter-firm

rivalry

argaining power of buyer

Cement firms are major play

their respective regions

High transportation costs le

bargaining power

Supplier argaining Power

MEDIUM

Fuel (coal), electricity & freight

companies are localized andmonopolistic, hence possess

some bargaining power

Threat of substitutes LOW

No major substitute to cement

found as of yet

Plastics, fly ash and bitumen maypose very limited threat


5/27

S

m

r

u

C

m

e

Competency Valuable Rare Inimitable Organization

com

Product innovation Yes Yes No Yes

Environment-friendly Yes Yes Yes Yes

Location/Presence Yes Yes No Yes

VRIO - Analysis

U

t

a

h

C

m

e

Competency Valuable Rare Inimitable Organization

com

Product versatility Yes No No Yes

Raw material sourcing Yes Yes Yes Yes

Production Technology Yes Yes Yes Yes

Logistics efficiency Yes Yes No Yes


6/27

Cement Production - Process

Quarrying

Raw materials Manufacture Distribution

Limestone

Clay/Shale

Sand/Ash

Fuel Coal,

Gas

Mixing

Grinding

Burning

Milling

Warehousing

Transportation

Sales/Delivery


7/27

Value Chain AnalysisUltraTech

Procurement

Greatest strength of

UltraTech lies in its raw

material sourcing

High quality raw

material quarries in

possession

Locked-in resources

through long-term lease

contracts

Technology

Development

Focused on

development of state of

the art tech to improve

efficiencies and seek

advances in products.(UltraTech Annual Report 2011)

Deep pockets and

backing by Aditya-Birla

Group allow investment

in Tech development

Human Resource

Management

New initiatives to

provide growth

opportunities within

organization and stem

attrition

Rollout of Employee

Value Proposition and

Career Portal Platform(UltraTech Annual Report 2011)

Marketi

Immense focus

increasing brand

awareness throu

associations an

sponsorships

Close monitori

usage patterns,

awareness and

draw insights int

consumer beha


8/27

Value Chain AnalysisSamruddhi

Human Resource

Management

Culture of high

performance encouraged

Implementation of

PeopleSoft HRMS,

variable pay plan and job

bands (Samruddhi AnnualReport 2009-10)

Technology

Development

Heavily focused on R&D

to develop innovations in

cost optimization and

environment protection(Samruddhi Annual Report 2009-

10)

Sustainable

development and

alternative methods of

production stressed on

Distribution

Pan India presence of

Samruddhi eases

distributional constraints

Significant division of

capacity across all major

regions of India


9/27

Corporate Strategies

UltraTech Cements aims to prevail over mutedgrowth by keeping long-term fundamentals and

growth prospects intact (UltraTech Sept. 2013 Business India)

UltraTech has been looking at ramping up capacity

and presence across local markets and regions

through its acquisitions.

Acquisitions have been few and well-paced. The

motives behind these deals are majorly propelled

by intent of gaining market share, access to new

locations and addition of specialty products to the

portfolio.

Export has also been recognized as a thrust area

in the companys strategy for growth. Opportunities

for global acquisitions have also been explored to

this end.

1

2

3

4

UltraTech Cements Ltd.

Aggressive growth and immense flex

stressed. Aim is to grow faster than t

(moneycontrol.com)

Continues to focus on increase in m

share and taking marketing initiatives

create differentiation

De-merged from Grasim Industries t

creation of pure-play cement operatio

turn increased focus

1

2

3

Samruddhi Cemen


10/27

Merger MotivesUltraTech Cement Ltd. (Acquirer

Size and scale

The merger would make the new entity the largest cement corporation in Indi

and propel it into the top 10 cement companies in the world (by size)

The move would help UltraTech scale up its operations by virtue of the size of

two merging entities. 48.8 million TPA of grey cement across 22 plants, 504 M

captive thermal power plants and 11.7 million cubic meters of ready mix concr

across 68 plants.

Geographical

Diversification

The merger would result in pan India presence with facilities covering almo

entire country. UltraTech will become a pan-India player with a 20 per cent mar

share.

It will also provide platform to diversify into neighbouring countries

Addition to product

portfolio

UltraTech Cements stresses on possessing a wide portfolio of cement-based

products

Amalgamation with Samruddhi would assure it of new products such as white

cement and wall-care putty


11/27

Merger MotivesSamruddhi Cement Ltd. (Target

Cross-selling Synergy expected from cross selling various products - putty/RMC/White cem

alongside mainstream products delivered by UltraTech Cements Ltd.

Enhanced

Shareholder Value

With merger, it will become 'must hold' cement stock in India

Enhanced financial flexibility to help in accelerated growth

Platform for

aggressive growth

Upon effectiveness of the merger, Grasim will retain a strategic and controllin

interest in UltraTech while providing UltraTech flexibility for future fund raising

Availability of raw

materials

Presence of sizeable limestone reserves to fuel future growth

Access to UltraTechs quarries and raw material reserves which form a major

strength of the company


12/27

Pre Merger Scenario

Grasim

Separate cement division

Controlling stake in UltraTech cement

De-merger of Grasim Cement

Cement division of Grasim to be de-merged into Samrudhhi

100% subsidiary

Eventual Equity stake in Samrudhhi: 65% Grasim ,35 %

Grasims existing shareholder

Samrudhhi to be listed post demerger


13/27

Due Diligence

Economic factors affecting the sector

(20082009) Economic slowdown affecting the industry Drastic fall in demand of cement

Monetary PolicyAggressive monetary expansion by RBI to spurt up demand, cred

available at low rates

Growth in the sector Cement sector forecasted to grow at 10% CAGR till FY13, indus

capacity in 2009 not enough to meet demand in future

Technological risks in target Some of the plants of Samruddhi cement required capital

expenditure (1800 Cr.) to bring them on par with Ultra tech ceme


14/27

Post Merger Scenario (1/2)

Capacity UltraTech Samruddhi Combined

Grey CementMillion

TPA23.1 25.7# 48.8

Composite

PlantsNo 5 6 11

Grinding plants No 6 5 11

White CementMillion

TPA- 0.6 0.6

TPPs MW 236 268 504

RMCNo. 32 Plants 36 Plants 68 Plants

MillionCu.M

4.99 6.76 11.76

Key Investments -Subsidiaries

80% Equity inLanka

100% Equity in

Harish Cements

Ltd.

CombinedInvestments

Market Share : Grey

Cement

(Source:CMA)

9% 10% 19%

# Including grinding mills operation in Q3-FY10


15/27

Post Merger Scenario (2/2)

Combined Financials


16/27

Highlights of the Restructuring

The shareholders of Samruddhi Cement (SCL),Grasim's demerged cement business would receive

four shares of UltraTech (UTC) for every sevenshares of SCL

Post-merger of SCL, UTC would be the largestcement company in India, with 49.4mt capacity(including white cement) and the 10th largest in the

world.

The merger ratio of 0.57x (UTC:SCL) values SCL at

US$107/ton (at UTC's current market price ofRs729) as against UTC's current valuation ofUS$79/ton (pre-merger).

The deal is marginally favourable to Grasim'sminority shareholders, with economic interest incement capacities going up from 29.1mt to 29.4mt.

Post merger, Grasim will own 60.3% stake in UTC.

The appointed date of the merger is 1 July 2010.


17/27

Deal Structuring

All stock deal - Consolidation, Non taxable transaction


18/27

Term Sheet (1/2)

Consideration

the exchange ratio approved by both boards is 4 (four) equity shares of UltraTech of faceRs.10 each for every 7 (seven) equity shares of Samruddhi of face value Rs.5 each.

Ownership

UltraTech will issue 14.95 crore new shares, thereby increasing its equity capital t274.20 crore

Ownership in merged company: Grasim: 60.33%, Ultratech minority shareho

20.57% & Grasim shareholders: 19.1%

Price

Offer Price per share : Rs 729.40

Total Enterprise Value of Target: Rs 8702.03 Cr (30/09/2009)

Transaction value(not including net debt of target): Rs. 3816.5 Cr

Transaction value (including net debt of Target): Rs 5831.3 Cr


19/27

Term Sheet (2/2)

Deal Details Deal Type: Merger

Acquisition Technique: Internal Reorganization

Appointed date for the merger: July 1, 2010

the merger is to be undertaken through a court-approved scheme of amalgamation uSections 391 to 394 of the Companies Act, 1956.

Expected Synergies The combined entity's PAT will stand 140 per cent higher than the standalone PAT o

UltraTech Cement

At the operating level, there has been a significant saving, particularly in fuel costs.

Combined captive power capacity of UltraTech Cement and Samruddhi Cement willstand at 504 MW post-merger

The debt-to-equity ratio of the combined entity will be less than 0.5


20/27

Organization Issues

Similar underlying culture because of same Parent

A special Merger Implementation Committeewas constituted at thBoard level, under the Chairmanship of a Non-Executive IndependentDirector for evaluating the consolidation of the cement business asproposed by Samruddhi Cement Limited (Samruddhi)

No layoffs

Name of Member No of Meetings Sitting fees paid(Rs.)

Held Attended

G.M.Dave 3 3 60,000

N.J.Jhaveri 3 2 40,000

D.D Rathi 3 3 60,000


21/27

ACQUIRER FIRMS MODES

ACCULTURATION

Post merger integration - Culture

How much does the acquired firm value

preservation of its own culture?

Perception

ofattractivenessof

theacquirer

Very much Not at all

Attractive

Integration Assimilation

Notatt

ractive

Separation De-culturation

TARGET FIRMS MODES OF

ACCULTURATION

Degree of Multi-Culturism

D

iversification

Strategy

D

egreeofrelated-ness

Multi-Cultural Uni-Cul

Related

Integration Assimila

Unrelated

Separation De-cultu

An agreement appears to exist in the mode of acculturation assimilation among both tarand acquirer firms.

A S f l D l


22/27

A Successful Deal

The deal made the company 10th largest in the world and largest in India

Company got stronger hold on distributors because of its market size Pricing in cement industry could now be dictated by the company

Pan-India presence enabled faster service, wider distribution and low cost

Source: The Hindu, moneycontrol.com

INVESTORS CONFIDENCE

Share price increased by over 57% in next two years, currently higher by 128% when compared to 15 Nov, 200

The merger will achieve the group's objective of consolidatin

its cement business into a single entity, thereby creating a

platform that will help in pursuing aggressive growth goingforward.

Fi i ll h C T k Hi


23/27

Financially the Company Took a Hit

Six Month Later

Profit margins hit due to oversupply in short term

Economic slowdown affected the off take of cement in South India, which accounted for 33% of sal

Raw materials cost rose by over 12%, while price of cement remained flat

Company faced acute shortage of wagons Transportation cost rose by over 10%

Huge capital expenditure to the tune of Rs 10,000 Cr planned between 2009-2012

Company continued on acquisition spreeETA star cement

Source: ultratechceme

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

BSE ret

Ultrate

Market Reactions

A l i f M k R i


24/27

Analysis of Market Reaction

Assumptions and Calculations

A clean period -40 day to240 day was chosen to calculate the Alpha and Beta of the stock using regression a

Predicted returns were then calculated for the period of -10 day to +10 day

Predicted return = Alpha + Beta * Market return

Difference between Actual return and Predicted return was calculated

The mean of difference turned out to be zero

Time period P(T0.05

- 3 day to +3 day 0.25882055 0.517641101Cannot reject null hypothesis because

p>0.05

Inference

There was no significant effect on the share price as a result of announcement by the company of acquisition

The results obtained from T test performed on Actual returns vs. Predicted returns yielded the

following:

U i A f h D l (1/2)


25/27

Unique Aspect of the Deal (1/2)

Date

Announce

d

Target

Name

Acquirer

Name

% of

Shares

Acq.

%

Owned

After

Trans-action

Value of

Transacti

on

($mil)

Value

inc. Net

Debt

of Target($Mil)

15/11/200

9

Samrudd

hi

Cement

Ltd

UltraTec

h

Cement

Ltd

100.00 100.0 826.443 1,262.71

5

09/11/201

3

Jaypee

Cement-

Cement

Unit(2)

UltraTec

h

Cement

Ltd

100.00 100.0 600.704 600.704

10/06/2010

BinaniCement

Ltd

BinaniIndustrie

s Ltd

25.11 95.0 96.441 96.441

05/09/200

8

Indorama

Cement

Ltd

Mysore

Cements

Ltd

100.00 100.0 41.194 41.194

10/14/200

5

Everest

Industries

Ltd

Everest

Finvest(I

ndia)Pvt

Ltd

50.00 50.0 22.173 22.173

In order of Value of Transaction; Target Industry: Stone, Clay, Glass and

Concrete products; Target Short Business: Cement and related

Largest deal in the sector in terms of value

Date

Announce

d

Target

Name

Acqu

Nam

11/15/20

11

Andhra

Cements

Ltd

Jaype

Deve

ent C

Ltd

01/31/20

07

Vinay

Cements

Ltd

Inves

Grou

10/16/20

05

Everest

Industries

Ltd

Evere

Finve

dia)P

10/14/20

05

Everest

Industries

Ltd

Evere

Finve

dia)P

10/03/20

09

Samruddh

i Cement

Ltd

UltraT

Ceme

Ltd

10/06/20

10

Binani

Cement

Ltd

Binan

Indus

Ltd

Source Database: Special Mergers Sector, SDC

Date

Announced

Target NameAcquiror

Name

Ratio of

Enterprise

Value to

Sales10/14/2005 Everest

Industries

Ltd

Everest

Finvest(India

)Pvt Ltd

.996

01/31/2007 Vinay

Cements Ltd

Investor

Group

1.160

10/06/2010Binani

Cement Ltd

Binani

Industries

Ltd

1.390

10/03/2009 Samruddhi

Cement Ltd

UltraTech

Cement Ltd

2.075

Date

Announced

Target NameAcquiror

Name

Ratio of

Enterprise

Value to

Net

Income

01/31/2007 Vinay

Cements Ltd

Investor

Group

8.145

10/06/2010BinaniCement Ltd BinaniIndustries

Ltd

10.739

10/03/2009Samruddhi

Cement Ltd

UltraTech

Cement Ltd

16.991

Highest ratio of enterprise value to sales Highest ratio of deal va

Highest ratio of enterprise value to Net

Income

U i A f h D l (2/2)


26/27

Unique Aspects of the Deal (2/2)

D Muthukumaran, Head Group Corporate Finance of AV Birla Group:

The company did not directly sell the cement business to UltraTech, its wholly-owned subsidiary, a

would have involved huge taxation. Even if we find a solution for the tax issue, the shareholders ofGrasim will not get direct exposure in the eventual cement company

Grasim didnt Merge Cement Biz with UltraTech

Restructuring

Grasim and UltraTech shareholdersto have direct holding in thecement company

Deal gives financial flexibility togrow faster

Post merger will support UltraTechto maintain its credit rating

Operating Efficiency

The merged entity becomes amongthe more efficient cementproducers in the country.

For FY-10, Grasim Industries'standalone numbers showed netprofit margin improve by fourpercentage points to 19 per cent.

The combined entity's PAT stands140 per cent higher than thestandalone PAT of UltraTechCement

All-India presenc

UltraTech Cement, whichpredominant player in theand southern market, gai

access to markets of the Nafter its merger with SamCement.

UltraTech Cement got cloper cent share of the greymarket in India and becomlargest cement manufactucountry with an all-India p


27/27

Thank You

merger - samrudhhi cement & ultratech

Documents