Lafarge, you are too large

A little under 17 years after Lafarge entered India by acquiring Tata Steel’s cement business, it has put its entire operations on the block. The potential buyer will need to cough up ₹10,000 crore, which is 2x sales, for an installed capacity of 11 million tonne. Of this, almost half the capacity is in eastern India, a region that accounts for 52 million tonne of the total all India capacity of 370 million tonne.

The decision to exit India comes after the global merger in 2015 to form LafargeHolcim, an entity with a presence in 90 countries and a turnover of $33.6 billion. Soon after this merger was announced, Lafarge India was directed by the Competition Commission of India (CCI) to sell its assets in eastern India, which had a capacity of 5.15 million tonne. CCI feared a monopoly given that Holcim’s India entities, ACC and Gujarat Ambuja already had a strong presence. A deal inked with the MP Birla group to sell Lafarge India’s assets for ₹5,000 crore did not find favour with CCI. The deal hinged on the MP Birla Group securing mining rights in eastern India, which did not fructify. Now, Lafarge has placed its entire Indian business on the block. More importantly, the potential buyer will not face the hurdle of securing mining rights since it is not a piecemeal sale.

In many ways, the pitch for the business promises to be fascinating. Already, CCI has made it clear that UltraTech, which has a capacity of 12 million tonne in eastern India, cannot bid due to its already prominent presence. The same monopoly rationale will prevent Shree Cement and Dalmia Cement from making a bid as well. The plants in eastern India, a region that operates at an 85% capacity utilisation compared to the 68% at the all India level, are the jewels in Lafarge India’s crown.

Girish Choudhary of Spark Capital Advisors thinks Lafarge’s assets can be acquired by mid-tier domestic players like JSW Cement or even an international player like Ireland-based CRH, which has a joint venture with the Hyderabad-based My Home Industries. JSW’s chairman, Sajjan Jindal has already expressed interest in acquiring Lafarge’s assets. The company, in late 2013, had bought over Heidelberg’s 0.6-million tonne grinding unit in Maharashtra and today has a capacity of six million tonne. The question really is about how much debt JSW is willing to take on its balance sheet.

“Some of the large private equity funds like Blackstone, who have already shown interest in India's cement story, will go for it,” adds Choudhary. In 2013, Blackstone came close to acquiring the south-based Sree Jayajothi Cements, before CRH eventually won the bid. At a valuation of ₹10,000 crore, the Lafarge deal will come at an enterprise value of $140 per tonne. According to Choudhary, that is reasonable given the profitability of its operations and in line with other deals in the sector. “The new buyer will get meaningful access to the eastern markets where the demand outlook is robust,” he thinks. While the MP Birla group was forking out $150 per tonne for Lafarge, UltraTech’s buyout of the debt-laden Jaypee Cement’s Gujarat business in 2013 was struck at $124 per tonne. Given the size of the Lafarge deal, the probability of JSW or My Home joining hands with a private equity major like Blackstone cannot be ruled out.

With a fairly large number of interested parties, it may not be easy for them to drive a hard bargain with Lafarge India. As Choudhary puts it, eastern India, which is the big story for Lafarge, is one where it has a good brand name. Ironically, none of the global biggies without a presence in India have evinced any interest in the asset. This includes Mexico’s Cemex, which is under considerable stress with high debt and is, in fact, looking to sell some of its assets. One potential buyer could have been Germany’s Heidelberg, which already has a capacity of 5.4 million tonne in India. It is, however, in the midst of acquiring Italcementi globally and how the Indian operation eventually plays out remains to be seen. For now, Lafarge’s forced-sale is of interest to see how much will bidders pay in this overall challenging market.