Wilmar to acquire 27.5% stake in Shree Renuka Sugars

To invest Rs 1,200 cr via preferential allotment, rights issue; to have equal representation on the board

Singapore-based Wilmar International Ltd, the world's largest palm oil processor, is acquiring 27.5 per cent stake in Shree Renuka Sugars Ltd (SRS) for Rs 517 crore. Through a second round, Wilmar will raise its investment to about Rs 1,200 crore. Both the tranches of investment will involve the issue of fresh equity capital by SRS.

The acquisition is being carried out through Wilmar's fully-owned subsidiary, Wilmar Sugar Holdings (WSH). The deal values SRS at Rs 1,880 crore. It has been proposed that proceeds of the stake sale will be used to repay SRS Rs 3,700-crore debt in Indian operations. The company's consolidated debt was Rs 8,480 crore as on March 31, 2013, significantly higher compared with Rs 840 crore in 2008.

The first step involves the investment of Rs 517 crore by Wilmar, through a preferential allotment of fresh equity shares of up to 257.5 million at Rs 20.08 each. After the preferential issue, existing promoters, as well as Wilmar, will hold 27.5 per cent of SRS expanded equity share capital. According to Securities and Exchange Board of India guidelines, Wilmar and the Indian promoters will carry out an open offer for up to 26 per cent (or 241.5 million shares) of the company's expanded equity share capital at Rs 21.89 a share. (REELING UNDER PRESSURE)

The second step will involve Wilmar and SRS's existing promoters participating in a rights issue to raise up to Rs 725.4 crore.

Ahead of the deal, the SRS stock closed at Rs 22.5 on the BSE on Thursday, up 3.7 per cent. This means the deal is at a 10 per cent discount to the market price, while the open offer price is 2.7 per cent lower than the stock’s closing price on Thursday.

Based on Thursday’s closing price, the company's enterprise value is about Rs 10,000 crore. Considering the standalone performance for the nine months ended December 2013, clearly, the company isn't generating enough profits to pay interest costs. For  April-December 2013, net sales were at Rs 4,663 crore (up four per cent year-on-year), while loss before tax and extraordinary items was Rs 252 crore (against a profit of Rs 58 crore in the year-ago period). At the level of earnings before interest, tax, depreciation and amortisation, the profit stood at Rs 84 crore, while interest outgo was Rs 212 crore (Rs 283 crore on an annualised basis). So, even if the funds of Rs 1,242 crore are used to repay debt, SRS will still have a loss at the net level in its standalone business. While the fund infusion will provide respite to SRS, its business fortunes need to improve substantially to make a difference.

Meanwhile, SRS has also signed a joint venture agreement with its promoters and WSH to jointly control the company. Both parties will have equal shareholding and board representation in SRS. While existing promoters will continue to oversee the company's management, Wilmar will be actively involved in strategic decisions.

The deal will help partly reduce SRS's consolidated debt, which rose sharply after the company acquired two Brazilian units in 2009 and 2010. In 2009, it had bought Vale Do Ivai SA Acucar E Alcool for $82 million (Rs 380 crore, according to the exchange rate at that time) and Equipav SA Acucar E Alcool in 2010 for $329 million (Rs 1,500 crore).

Wilmar’s investment is subject to the approval of SRS shareholders, anti-trust (competition commission) clearances in India and Brazil and other statutory clearances deemed necessary, said a note issued by the company. “As a strategic shareholder, WSH’s shareholding in SRS and the capital infusion will strengthen the company’s financial and business position and provide a further platform for growth,” it added.

SRS has convened an extraordinary general meeting on March 21; approvals will be secured through postal ballot. Motilal Oswal Investment Advisors is the strategic and financial advisor to SRS, while Crawford Bayley & Co, AZB & Partners and Veirano e Advogados Associados, Brazil, are the legal advisors. Standard Chartered Bank is the financial advisor and will manage the open offer.

One of India’s largest sugar companies, SRS was reeling under debt taken to acquire the Brazilian ventures. The partial decontrol of the sugar sector in May 2013 had offered opportunities to foreign buyers to acquire equity stakes in Indian ventures. For domestic as well as global sugar companies, this season was one of the worst, as prices fell considerably.

Wilmar is also Australia’s largest cane-milling company. With an annual milling capacity of 17 million tonnes (mt), it produces about two mt of raw sugar.

Wilmar has major stakes in sugar businesses globally, including assets in Australia, New Zealand and Indonesia (17 mt of cane-crushing capacity and 1.9 mt of refining capacity). It also has a 27.5 per cent controlling interest in Cosumar, Morocco, with refining capacity of one mt.