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CORPORATE FRONT: M&A
Why has Giant Grasim Bought Dwarf Dharani?

The acquisition is a small step for K M Birla to realise his dream of becoming the largest cement player in India.

By Roshni Jayakar and R Sridharan

K M BirlaIt was an impromptu deal. On April 19, 1998, Palani G. Periasamy, the 59-year-old CEO of the Rs 125-crore Chennai-based PGP Group, walked into the Dubai-based office of ANZ Grindlays Bank without any plan of sealing an agreement. But Periasamy, an economist-turned-businessman who was the director of graduate studies at the University of Maryland (US) in 1975-76, did plan to hold preliminary discussions about a possible deal with O.P. Puranmalka, the senior president (cement division) of the Rs 1,641-crore Indian Rayon.

After all, the US-based non-resident Indian had decided to exit the cement sector, and concentrate on his other, bigger businesses. The PGP Group owns sugar units with a crushing capacity of 6,250 tonnes crushed per day (TCD), apart from two licences, each allowing the addition of 2,500 TCD, and is setting up a 248-room, 5-star hotel in Chennai at an investment of Rs 120 crore. Explains Periasamy: ''There was no future in running a small cement plant, and we didn't have the money to expand the capacity.''

By the time the April 19 meeting ended, the two parties had finalised the sale of the Tiruchirapalli (Tamil Nadu)-based Rs 17.18-crore Dharani Cements, owned by Preisamy and his associates. Surprisingly, though it wasn't Indian Rayon which was involved in the Rs 53-crore acquisition. Instead, Puranmalka -- who is based in Secunderabad (Andhra Pradesh), and manages Indian Rayon's cement unit in Karnataka -- negotiated the deal on behalf of the Rs 3,599-crore Grasim Industries (Grasim), the flagship of the Rs 15,500-crore Aditya Vikram Birla Group. With the acquisition, the group will become the second-largest cement manufacturer in the country. Post-acquisition, its 8.57-million tonnes per annum (tpa) capacity will be spread across three companies: Grasim (5.30 million tpa), Indian Rayon (3.20 million tpa), and Dharani Cements (66,000 tpa). Only the Rs 2,469-crore Associated Cement Companies has a higher capacity, of 10 million tpa.

But mere acquisitions will not be enough, even though group chairman Kumar Mangalam Birla, 30, has time and again reiterated that future growth in core areas will come through acquisitions rather than greenfield projects. For, the real benefits will only accrue if the group consolidates all the units -- either under a single company, or by establishing a centralised marketing network. Explains Birla: ''The Dharani Cements' acquisition enables us to gain a foothold in South India, particularly in Tamil Nadu and Kerala. It also elevates Grasim to the position of one of the country's leading players in the cement sector.'' But more than that, it allows Birla to cement a blueprint for consolidation. And the plan will be concretised further after his plan to acquire the 6.50-million tpa capacity of the Rs 4,500-crore B.K. Birla Group in the future materialises.

But the immediate advantage of purchasing a small cement unit -- although Dharani Cements has a Rs 245-crore expansion plan to increase the existing capacity by 0.83 million tpa at the same site -- is of gaining a toehold in the market. For, at present, Grasim's three plants -- two units in Madhya Pradesh, Vikram Cement (2.50 million tpa) and Grasim Cement (1.80 million tpa), and one in Rajasthan, Aditya Cement (1 million tpa) -- only serve the markets in northern, eastern, and western India. But the company expects the cement deficit in Tamil Nadu and Kerala, currently at 4.55 million tonnes in 1996-97, to increase to 7.22 million by 2001-02. These markets are currently catered to by units in Andhra Pradesh and Karnataka which, thus, pay higher freight costs.

Industry experts, however, believe that these numbers could undergo significant changes. Says Anil Singhvi, 39, the treasurer of the Rs 921-crore Gujarat Ambuja Cement: ''The dynamics of the industry in South India is changing since large capacities are being set up in Tamil Nadu, even as the demand is tapering off.'' According to Singhvi, while Kerala is witnessing a negative growth, the demand in Tamil Nadu grew by only 5 per cent in 1997-98. Moreover, the installed capacity in the two states is expected to go up four times -- from 2 million tpa to 8 million tpa -- in the next few years. Naturally, cement prices are expected to come down. Indeed, in Kerala, prices have already crashed from Rs 170 per bag in October, 1997, to Rs 145 per bag today.

P G PeriasamyBut then, this reasoning may also be a case of sour grapes since many bidders -- including the Rs 816-crore India Cements, the Rs 5,304-crore Larsen & Toubro, and the Rs 284-crore Dalmia Cements -- were also in the race to acquire Dharani Cements. In fact, all of them, including Gujarat Ambuja, which evinced interest in Dharani Cements last June, had offered higher prices. Periasamy's decision to choose Grasim was guided by the future -- and not the price -- of his company. Reasons Periasamy: ''I was looking for a buyer who had the financial resources to complete the expansion (within 18 months), could retain the workforce, and continue selling under the Dharani brandname.'' In the agreement, signed in Dubai, Grasim has agreed to all the three conditions.

Apprehensions about the acquisition may also be proved wrong since the limited limestone reserves in the South will offer little opportunity for additional capacities to be set up in the region. Fortunately for Birla, Dharani Cements is sitting on a huge 750-acre limestone reserves -- enough to sustain a 1-million tpa plant for 65 years -- next to the cement unit. Agrees a Mumbai-based analyst at Credit Rating Information & Services of India: ''Taking over an existing unit is, possibly, the only route available for cement companies which don't have a presence in the southern region.'' An additional advantage for Grasim is the Rs 203-crore sales-tax benefit available to Dharani Cements over the next six years.

Of course it would still have made more sense for another group company, Indian Rayon, to acquire Dharani Cements. For, Indian Rayon -- which has cement units at Malked (Karnataka), and Hotgi (Maharashtra) -- could have taken advantage of its existing distribution channel in the region. By contrast, Grasim may have to establish a new network. But then, the acquisition is meant to fit in with Birla's long-term vision of consolidating his cement empire once he acquires the units owned by the three B.K. Birla Group companies: the Rs 1,991-crore Century Textiles, the Rs 607-crore Kesoram Industries, and the Rs 244-crore Mangalam Cement.

After the consolidation, Birla will -- apart from becoming the single-largest cement manufacturer -- have units spread across the country. But the acquisition of Dharani Cements is only a small step towards realising the dream. Not surprisingly, he is evaluating the possibility of more acquisitions in the future. For, being bigger is the only way that can further cement his dominant position in the industry.  

 

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