Minority shareholders question Century Textiles-UltraTech Cement deal

Bilateral agreement process and valuation on the radar

Not everyone is happy with UltraTech Cement’s recent deal to acquire B K Birla firm Century Textiles’ cement business in a share-swap deal. The deal, a few minority shareholders suggest, could have been finalised through an open bidding process to arrive at a fair market value.

Top executives from both companies remain confident the deal is at the best valuation and that shareholders will eventually see its true value.

On May 20, UltraTech Cement said it would acquire the cement business of Century Textiles. Under the arrangement, Kumar Mangalam Birla-led UltraTech will merge Century Textiles’ 13.4 million tonnes per annum (mtpa) cement capacity with itself. Century Textiles Chairman B K Birla is Kumar Mangalam’s grandfather.

Two days later, a few minority shareholders raised concerns over the valuation in the analyst call. “As minority shareholders we are not happy with the valuation that has been offered. I feel as management we have fiduciary duty to get bidding from other suitors as well so as to know what the fair market value of the asset is,” said a representative from Goldman Sachs on the call on May 22. As of March 2018, Goldman Sachs India held a 1.25 per cent stake in Century Textiles. The spokesperson concerned for Goldman Sachs refused to comment on the story.

The Goldman Sachs representative is not an exception. At least four other investors and analysts on the call who identified themselves as minority shareholders raised concerns over the process. However, officials from Century Textiles and UltraTech remain hopeful that minority shareholders will see the real value. “The bidding process would have been tax inefficient and time-consuming and would have resulted in turbulence for the current cement operations, as employees and dealers go through a period of uncertainty,” said a spokesperson for Century Textiles.

The official added the asset had received the best valuation given the limitations it faced. The Century Textiles management had explained to both media and analysts that the cement assets were old, under-utilised and would require fresh investments. The spokesperson also added that both companies share similar culture and the sale will create minimum disturbance for employees.

“I do hope when people reflect on the deal, they will understand. To say proper value was not realised in not appreciating the entire context. The objective is to get a good deal for the company,” said KK Maheshwari, managing director for UltraTech Cement in an interview with Business Standard. He added that there were a number of deals that had happened in the cement sector and “everyone knows what the benchmark for a deal is”. Deals, he added, had taken place in the range of $110 to $120 per tonne.

  

To be sure, the process to convince shareholders is going on. Officials are reaching out and explaining the deal merits to fund managers as part of their normal process. Gautam Dedhia from Nalanda Securities, a boutique wealth management firm, is one such investor who is convinced. “They explained on the call that some of the assets are old and the company’s focus is on real estate. After that we are happy and convinced about the deal,” said Dedhia.

Not just minority shareholders, proxy advisory firms also seem divided on the deal. Firms like Institutional Investor Advisory Services (IiAS) have raised certain concerns.

“It is a valid concern that assets are changing hands without any competitive bid. The current trend of transactions such as Lafarge, which went at $150 per tonne, and UltraTech’s willingness to pay more for Binani assets are two examples,” said Anil Singhvi, founder, IiAS. “Old and new assets do not matter as long as they are well maintained,” Singhvi said.

On the other hand, proxy advisory InGovern’s managing director Shriram Subramanian said, “As long as the acquisition is at fair market value, the acquisition is fair to the interests of minority shareholders. The finer details will be available once the proposal is put to the Century shareholders for vote.”