The merger valuations are attractive for UltraTech, while carving out the cement business and merging it with UltraTech will help Century Textiles pare debt. UltraTech Cement, with its distribution capabilities and better brand, would be able to command better realisations for Century Textiles’ output, said Hemant Nahata, assistant vice-president for research, IIFL Wealth and Asset Management.
Though the deal might seem to be lacklustre for Century Textiles’ shareholders initially but over the longer term, it would be beneficial since the shareholders would have access to better valued company.Hemant Nahata, AVP-Research, IIFL Wealth & Asset Management
Shares of Century Textiles slumped 8.55 percent to Rs 975 in early trading today. It has fallen 30.4 percent so far this year, compared to a rise of 2.6 percent in the benchmark S&P BSE Sensex in the same period. UltraTech Cement shares rose as much as 4.22 percent to Rs 4,021 today. It has fallen 9.7 percent so far in 2018
Vinit Bolinjkar, head-research at Ventura Securities, said the merger is a win-win for both the companies in the long-term. “While Century Textiles’ debt will come down with this deal, giving it more bandwidth to focus on high-yielding real estate business, for UltraTech Cement this deal is furtherance to its aggressive growth strategy and also much in-line with industry’s standards.”
- UltraTech will get three integrated cement units of Century Textiles in Madhya Pradesh, Chhattisgarh and Maharashtra with a total capacity of 11.4 million tonnes per annum and a 2 MTPA grinding unit in West Bengal.
- Shareholders of Century Textiles will get one equity share of UltraTech for every eight equity shares held.
- The transaction is expected to be completed in the next six to nine months once regulatory approvals come in.
- UltraTech will assume cement divisions’ Rs 3,000 crore debt.
The Valuation Math
The deal pegs the enterprise value of Century Textiles’ cement business at Rs 8,621 crore for the 11.4 MT capacity, implying an enterprise value per tonne of $106. That is lower than UltraTech’s deal with the Jaypee Group in July 2016, where UltraTech proposed to buy the debt-ridden group’s 21.2-MTPA plants for an enterprise value of Rs 16,189 crore, or $117 per tonne.
UltraTech Cement has an enterprise value of Rs 1,20,045 crore for its domestic capacity of 92.5 MTPA, implying an enterprise value per tonne of $194, according to BloombergQuint's calculations. The industry standard is currently $100.
The acquisition will make UltraTech the number one player in the east, up from its current number two ranking, and help extend its leadership in the west and central regions, Macquarie wrote in a note to its clients.
Also Read: Cement Prices Rise For Second Straight Month
Credit Suisse is circumspect about the geographical synergies. “The acquired assets are close to existing assets of UltraTech and therefore do not offer a new market to UltraTech,” the brokerage wrote in its note to clients. It, however, added that synergies exist from the higher pricing power of the UltraTech brand, procurement benefit from economies of scale, and logistical advantages by redistributing Century output.
Shareholding Pattern Changes
UltraTech will issue 1.4 crore new equity shares to the shareholders of Century Textiles, which will increase its equity capital to Rs 288.58 crore, according to the press release issued by the companies.
Here’s more from brokerages had to say about UltraTech post the deal:
- Maintains ‘Outperform’ rating ; target price of Rs 4,950.
- The 13.4 MT of cement capacity comes at an enterprise value of $96 per tonne; this is 20 percent lower than replacement costs, and 47 percent lower than UltraTech’s FY20 EV/tonne.
- UltraTech will become the number one player in the east. Currently it is the second placed company.
- Trailing earnings suggest 4-5 percent earnings per share dilution for UltraTech.
- Increase in efficiency and brand premium should make the deal EPS accretive.
- Maintains ‘Underperform’ rating ; retains target price of Rs 3,500.
- Century Textiles’ assets are located close to those of UltraTech’s, and don’t offer new market.
- Synergies due to higher pricing of UltraTech brand, procurement and logistical advantages.
- Even with potential synergies UltraTech’s return on capital employed may at best double but still remain sub-10 percent.