(Another) Billion buck buyout

Tata Chemicals has begun the New Year with a bang. A $1-billion (Rs 4,000 crore) acquisition of 100 per cent of US-based General Chemical Industrial Products (GCIP) has, in one stroke, almost doubled its soda ash capacity. Prior to the buyout, Tata Chemicals had a soda ash capacity of 2.9 million tonnes per annum which is now up to 5.4 million tonnes per annum. Soda ash is used in the manufacture of detergents and glass.

“Soda ash is one of our core businesses and has been the backbone of the company. This is a timely acquisition and is taking place at a time when the rupee is strong,” says Homi R. Khusrokhan, Managing Director, Tata Chemicals. Though he declined to give details on the global pecking order for soda ash, it is estimated that this buyout will place Tata Chemicals in second position, after US-based FMC Chemicals. This is Tata Chemicals’ third purchase in the global soda ash sector—in December 2005, it had acquired a majority stake in the UK-based Brunner Mond Group; this was followed up by a purchase of a 33 per cent stake in Morocco’s Maroc Phosphore SA in March 2005.

Along with GCIP comes a subsidiary, General Chemical (Soda Ash) Partners (GCSAP), which has mining and manufacturing facilities at Green River in the US state of Wyoming. More importantly, Tata gets access to the world’s largest reserves of trona—of around 67 billion tonnes—which is a key ingredient in making soda ash. “GCIP has nearly 100 years of extractable trona,” says Khusrokhan. GCIP’s majority shareholder is Harbinger Capital Partners, a US (Alabama)-headquartered private equity player. The company had revenues of $400 million (Rs 1,600 crore) for 2007, with capacities across America, Africa, Europe and Asia. GCIP is also a debt-free company.

“The acquisition will give us ownership of another low-cost source of soda ash. This will insulate Tata Chemicals from any downward risk and will also give us access to global customers,” points out Khusrokhan. Besides, the cost of manufacturing natural soda ash is about half that of making synthetic soda ash.

The acquisition is being funded through a combination of debt and equity. Commenting on the process of valuation, Khusrokhan explains this was done taking into consideration the projected cash flow. He adds that margins in the soda ash business are at their all-time highs.

“Generally, EBITDA (earnings before interest, tax, depreciation and amortisation) margins are high in this business—upwards of 35 per cent. To that extent, the payback for this acquisition will be quite fast,” thinks Jigar Shah, Senior Vice President & Head of Research, Kim Eng Securities (India).

It isn’t just Tata Chemicals that has been on the global takeover trail. Nirma, another soda ash manufacturer, recently acquired US-based natural soda ash producer Searles Valley.

— Krishna Gopalan