When Ultratech Cements, owned by the Kumaramangalam Birla Group, made an aggressive Rs.7266 counter bid for Binani Cements, it not only set a new price benchmark for Binani Cements but also called into question many of the accepted tenets of dealing through the NCLT. While the last word has not been said on that Binani Cements acquisition, it is surely going to be a benchmark for future deals pertaining to stressed companies. But first, the background of the case!
How the Binani Cement acquisition case piled up…
When Binani was referred to NCLT, both Ultratech and Dalmia Cements were part of the bidders. The resolution professionals selected the bid made by a consortium of Dalmia Cements and Piramal Group. While the actual details of the bids have not been divulged, market sources do affirm that the bid of Rs.6350 by Dalmia consortium was slightly higher than the Rs.6200 bid put by Ultratech. Immediately after Dalmia was announced as the highest bidder, Ultratech made a counterbid for Rs.7266 crore outside the purview of the NCLT. Ultratech directly made an offer to buy out the 98.43% shares of Binani Cements at a valuation of Rs.7266 crore. The deal was also acceptable to Binani Cements since they were getting a sharply higher valuation and the debtors also would be fully paid off. While both Ultratech and Binani are interested in this revised deal, Dalmia Cements has moved the NCLT Appellate Tribunal to declare Ultratech’s bid as void as it circumvent the basic objectives of the NCLT.
Transparency versus the rule book: what are the stakes?
Both Binani and Ultratech have raised concerns over transparency in the deal. Binani’s contention is that they should have been invited for discussions on the bid which was apparently not done. Binani claims since they owned the business, they understood the nuances of the valuation much better. Their participation would have enabled them to get a much better valuation in the market. Ultratech has expressed the view that the norm is to call for a second round of negotiations once the primary bids are taken into account and that Ultratech had reserved the best for the last round of negotiations. Dalmia Cements is of the view that if Ultratech really had the intent of quoting Rs.7266 crore they should have quoted the same during the bidding process itself. Once the bidding process is completed, making a counter bid which is outside the purview of NCLT tantamount to undermining the sanctity of the NCLT process. Dalmia Cements also believes that if Ultratech Cements is permitted to make a counter bid outside the NCLT purview, it could become a template for promoters of stressed companies to approach large business houses to bail them out at better valuations.
Why is Ultratech willing to pay such a huge premium?
As Ultratech claims, it is understandable that they may have reserved their best bids for the last round, which never happened. Ultratech, like Binani Cements, has expressed reservations over the transparency in the bidding process. But, why is Ultratech willing to pay such a huge price for Binani Cements which is already deep enough in debt to be referred to the NCLT? Firstly, Binani has a 6.25 million tonnes integrated cement plant in Rajasthan as well as 5 MT grinding units in China and Dubai. Binani gets 70% of its sales from India and 30% from abroad. Secondly, while Ultratech is already the largest cement company in India, this acquisition gives them the much needed access to the North Indian markets. Lastly, the offer of Rs.7266/crore implies an EV of $103/tonne, which is actually more attractive than what Ultratech had paid for Jaypee. It becomes still more attractive when you consider that Binani has large limestone reserves that can be critical in Brownfield expansion.
Acquisition 101 – What is the likely direction of this Ultratech bid for Binani?
While the case could drag on for a long time at the NCLAT and the Supreme Court, if required, there are 5 key takeaways we need to understand here…
- There is a valid question that has been raised over the transparency of the bidding process and if the NCLT has to really be meaningful it has to adopt a more transparent process. The process cannot leave too much to the discretion of the resolution professionals and the major bank creditors who represent the voting power.
- Ultratech bid is more in favour of all the creditors including the small creditors of Binani Cements who are the most vulnerable. One of the reasons for large banks being unhappy with the Ultratech bid is that they would not get the preferential treatment they got under the NCLT. But banks are ultimately dealing with public money and public interest should hold.
- NCLT needs to rethink its entire process wherein the actual bidding should be based on transparent auction where only the reserve price is fixed. This will not only make the process transparent but also ensure that the assets command the best price.
- It is essential to identify the core purpose of the NCLT process. Is it to satisfy the banks who are the custodians of public money or is to get a good valuation that is equitable to all the stakeholders. Obviously, the latter should be the core focus of the NCLT process. From that perspective, the Ultratech bid appears to be more meaningful to the stakeholders.
- Lastly, in the entire process, there is a very important thing that the NCLT process should be cautious of. It is entirely possible that the promoters may use proxies to buy back into their own companies at discounted rates. That has been rightly barred by the NCLT and the process needs to ensure that such backdoor entries are not permitted.
The last word on the case may not have been said, but is likely to be an interesting template for the future.