UltraTech Cement merger with Grasim cement arm.

After demerging the cement business from Grasim Industries, the Aditya Birla group has decided to merge the new cement subsidiary with group firm UltraTech Cement Ltd.

Grasim Industries’ decision to restructure its cement assets into a separately listed entity, with the ultimate aim of merging it with UltraTech’s cement business, is seen in a positive light. However, while the deal looks beneficial from a long-term perspective, analysts believe that there are no immediate gains. But, they expect shareholders of UltraTech Cement to gain marginally from a possible re-rating in the near-term.

Grasim Industries demerged its cement business into Samruddhi Cement Ltd, a wholly-owned subsidiary of Grasim, as part of its restructuring plan, where Grasim’s shareholders would receive one equity share of Samruddhi for every one share they held in Grasim. Grasim has taken the first step towards consolidating its cement business into one entity, creating a new holding company.

Grasim plans to hive-off its cement assets, excluding its 54.78 per cent stake in UltraTech Cement, into Samruddhi Cement effective October 1, 2009. The shareholders of Grasim will get a share each of Rs 5 each in the new company, aggregating to 35 per cent (or 9.17 crore shares), while Grasim will continue to control Samruddhi with a 65 per cent stake (17 crore shares).

Later, Samruddhi will seek a separate listing, though it will be for a short-period, as consequent to approval of concerned authorities as well as shareholders of Grasim and UltraTech, the cement businesses of Samruddhi and UltraTech are planned to be merged to form India’s largest cement company with an installed capacity of nearly 50 million tonnes per annum (mtpa). Post merger, Grasim is estimated to have a controlling stake of about 60 per cent in the larger cement entity

The move is designed to ensure Grasim’s majority stake in, and continued support to, the rapidly growing cement business; while simultaneously, providing Grasim shareholders direct participation in the pure play cement company.

Whilst Grasim’s commitment to fund growth of cement business remains unabated, the demerger opens up new choices for financing this growth.” Eventually, it will also help create a platform for potential consolidation. All of which, should help maximise shareholder value in the long-run.

Grasim, meanwhile, would continue to focus on its VSF business, which so far provided a large part of the cash-flows to grow the cement business. Grasim is setting up a new Rs 1,000 crore project in Gujarat, which will increase its VSF capacity by 80,000 tpa. VSF, along with other businesses accounted for a third of profits of Grasim’s standalone numbers in FY09. Post demerger, Grasim will operate the VSF and other small business and have cash and investments worth Rs 1,500 crore. Analysts say, its ability to effectively utilise this cash and operating profits of over Rs 700 crore annually, will have a bearing on the value accretion for its shareholders, going ahead.

What needs to be watched is the merger ratio between Samruddhi and UltraTech. While the market is currently according similar valuations to the cement business of the two companies (adjusted for the different face values), in Grasim’s case, a few believe that there could be some upside in the form of a slightly better valuation given to Samruddhi due to its larger size and ownership of a profitable white cement business.

While the move is in the right direction, the concerns regarding the potential over-supply situation and soft cement prices loom large for the cement industry. In this context, many analysts believe that Grasim is fairly valued while they see gains of up to 10 per cent for UltraTech from current levels.

Ultratech Cement Ltd has announced that Ultratech Cement Ltd has received a consolidation proposal from Samruddhi Cement Ltd a wholly owned subsidiary of Grasim Industries Ltd.

Grasim has proposed to de merge its cement business to Samruddhi pursuant to a scheme of arrangement under Sections 391-394 of the Companies Act 1956, subject to necessary approvals.

The board of directors of UltraTech Cement  approved in-principle the merger proposal of group company Samruddhi Cement with itself.

The company has appointed Bansi Mehta & Company for the valuation exercise and UBS as investment banker.

The company expects the valuation report by the first week of November, and the board will meet again as soon as it receives the report.

The entire process will be completed within seven to nine months. Extra care will be taken to protect the interest of Grasim investors.Clearing misgivings that Grasim would be reduced to a holding company of the cement business, Mr Birla said the re-rating of UltraTech post-merger would more than make up for the loss, if any, incurred by Grasim shareholders.

While UltraTech commands an enterprise value of $110 a tonne, Ambuja Cement and ACC are rated at $147 a tonne, while it is $160 a tonne for Shree Cement. UltraTech will be re-rated substantially post-merger.

Grasim will continue to invest in cement through UltraTech though the mode of investment (debt or equity) will be decided at the appropriate time. The group does not propose to add any new business to Grasim as it wants to retain its identity of a textile company.