Fairfax India completes equity infusion in Sanmar Group, takes stake to 43%

Under the deal, Sanmar bought back bonds worth Rs 1,990 crore that had sold to Fairfax, which partly re-invested the proceeds into the chemical-making group's equity

Fairfax India Holdings Corporation has completed an equity infusion into Chennai-based Sanmar Chemicals Group, taking its equity interest in the group to about 43 per cent.

Under the terms of the deal, Sanmar bought bonds worth $300 million (around Rs 1,990 crore) held by Fairfax India, along with accrued interest at an effective annual interest rate of 13 per cent, for a net cash consideration of approximately $425 million (Rs 3,020 crore).

Fairfax India re-invested approximately $200 million (Rs 1,420 crore) of the cash consideration received from the bond sale to buy Sanmar common shares. 

Following this investment, Fairfax India’s equity interest in Sanmar has risen to about 43 per cent.

Fairfax India will retain approximately $225 million (Rs 1,600 crore) of the cash consideration for future Indian investments.

Between the third quarter of 2018, when the transaction was announced and September 30, 2019, Fairfax India recorded investment gains from Sanmar common shares and bonds of approximately $210 million and $100 million, respectively.

In 2017, Fairfax for the first time invested Rs 400 crore in Samar. Over the years it has been investing to back Sanmar group's $220 million capex for projects in Tamil Nadu.

Fairfax’s investment was in Sanmar’s chemicals business, which accounts for about 70 per cent of the latter’s operations, and is housed within three companies – Chemplast Sanmar (Chemplast), Sanmar Speciality Chemicals, and Egypt-based TCI Sanmar (TCI). 

Chemplast is Sanmar’s flagship company and a major player in the chemical business for over 50 years.

Sanmar’s capex plan includes increasing suspension PVC capacity in Cuddalore to 600 kilo tonnes per annum (ktpa) by 2023, and to 900 ktpa by 2025 at an investment of $186 million. The current capacity is 300 ktpa. 

The estimated incremental annual earnings before interest, tax, depreciation and amortisation (EBITDA) after the expansion would be $162 million.

Fairfax chairman Prem Watsa earlier said Sanmar’s consolidated financial results in 2018 were below expectations since TCI did not deliver due to a spike in raw material and energy costs, while Chemplast's financial results were good.

For the year ended December 31, 2018, Sanmar’s net loss was $91 million against a loss of $85 million in 2017. Revenue grew 10 per cent to $682 million. EBITDA for 2018 was up 10 per cent to $100 million. The Sanmar group has a sales figure of around $1 billion and assets worth $1.5 billion. 

Watsa said profitability is expected to improve significantly with capacity addition in Egypt. 

With the ability to refinance its existing debt and to realise increased demand for its products, Sanmar plans to add several new capital expansion projects in Chemplast. 

This will result in additional capacity for various products of around 420,000 tonnes per annum, with commissioning projected to be before 2024.