Investors of Shree Digvijay Cement Company were offered an extremely low valuation as the ownership was transferred from one company to another in a convoluted deal that made it look like an indirect acquisition. As expected, complaints made to the regulator remain unfruitful

A few weeks back Gujarat-based Shree Digvijay Cement Company (SDCCL), a 1.3 million-tonne (MT) capacity cement manufacturer, made a disclosure on the BSE website that its promoters Cimentos de Portugal (Cimpor), a Portuguese cement company, would be transferring its stake to Votorantim Cimentos (Votorantim), an unlisted cement company based in Brazil.  What transpired in the previous few months makes this look like a simple transfer of shares as the promoters are of the view that this is not a direct acquisition but an indirect acquisition through the acquisition of shares of Cimpor. But in fact on looking deep into the events that transpired over the previous year, Votorantim gave up its ≈21% stake in Cimpor to acquire other assets owned by Cimpor around the world which included SDCCL. The worst part is, as brought to our notice by two investors of SDCCL, that in the open offer, shareholders of SDCCL were offered a valuation of just $22 per tonne (Rs10.94 per share) whereas other cement companies in that period with the same capacity were quoting a valuation around $100 per tonne. All this happened under the Securities and Exchange Board of India’s (SEBI) nose and with its approval despite repeated complaints by the investors. We contacted SDCCL for their response, however, no reply was received at the time of publishing this story.

Discrepancy in valuation

The open offer made by SDCCL was valued by Kotak Mahindra Capital Company. The offer price quoted was Rs10.94 based on some valuation metrics. As per Kotak, the offer price was at a premium of 12.3% to the volume weighted average price for the two weeks prior to the date of the public announcement (PA) and at a premium of 15.2% to the volume weighted average price for 60 days prior to the date of the PA. By the time of the start date of the open offer, the offer price was at a premium of just 2.72%.

In terms of a key valuation indicator for cement companies, the enterprise value per tonne, the valuation done by Kotak worked out to just ≈$22 per tonne against a benchmark of $80-$100 per tonne for smaller cement companies around that time. The valuation done by Kotak was extremely low especially for a profitable company with a low debt. Agreeably, the promoters chose an opportune time when the company was highly undervalued and the shares were poorly traded. We have looked at other acquisitions of this size.

As per a recent research report, by Avendus, Jaypee Group made a deal to acquire Andhra Cements at an enterprise value of around $85 per tonne in December 2011. In September 2012, Dalmia Bharat Enterprises acquired the 1.5 MT Adhunik Cement’s plant in Meghalaya at an enterprise value of $120 per tonne with a capacity utilisation of 50%. In fact, Cimpor, in December 2007, acquired SDCCL at a valuation of $160 per MT!!

A complaint raised to SEBI by one investor in July 2012 on this discrepancy was answered by the banker to the offer who coolly stated that the “Letter of Offer” (LOF) has been approved by SEBI. The LOF also states the transactions that take place which, though convoluted, states that the transaction is an indirect transfer through acquisition. However, on taking a broader view, at the end of the transaction Cimpor transfers its control of SDCCL to Votorantim—seems completely like a direct acquisition.

Indirect acquisition or direct acquisition?

In March last year, Camargo Corrêa SA (Camargo), which holds ≈33% stake in Cimpor, through a company controlled by it—InterCement Austria Holding (InterCement)—made an open offer for acquiring the remaining shares of Cimpor. Later in May, the Portuguese Securities Commission directed that the tender offer be revised to a mandatory tender offer. Through the mandatory tender offer InterCement came to acquire ≈40% of Cimpor. Therefore, Camargo directly and indirectly held nearly 73% stake in Cimpor. (See chart below)
 

Now comes the interesting part, these companies entered into a restructuring agreement, where certain assets held by Cimpor and InterCement would be swapped. Cimpor transferred some assets (from Morocco, India, Turkey, etc, which included SDCCL) to InterCement and the latter transferred 17 operating plants to Cimpor. This was the first transaction for asset swap. Then, InterCement would then transferred these assets received from Cimpor to Votorantim for Votorantim‘s 21.40% stake in Cimpor. Cimpor’s assets in Spain, Morocco, Tunisia, Turkey, India, China and Peru, as well as a 21.2% stake in Cimpor’s consolidated net debt were valued at 817 million euros by two independent investment banks, Morgan Stanley and Rothschild. A corporate announcement on Cimpor’s website states that the transfer of its assets from InterCement to Votorantim is outside its corporate sphere. Both InterCement and Votorantim are unlisted companies.
 

 
Therefore, Votorantim has direct control of SDCCL through this restructuring even though it did not make an initial acquisition offer for Cimpor. Now as the first acquisition offer was made in March, the open offer in SDCCL was triggered as per SEBI’s Substantial Acquisition of Shares & Takeovers (SAST) Regulations, 2011. However, the open offer was announced much later in June and soon after the restructuring agreement. This avoided two open offers being triggered, the first being the acquisition by InterCement and then the transfer to Votorantim. The regulator didn’t seem to mind.