PGCPIBF Batch:02

Mukesh Tiwari
20-Jun-19
 INTRODUCTION

UltraTech Cement-Jaypee Group | Deal size: Rs 16,189 crore

UltraTech Cement completed the USD 2.54 billion acquisition of Jaiprakash

Associates' six integrated cement plants and five grinding units, having a
capacity of 21.2 million tonnes last year. Post-acquisition, UltraTech has become
the fourth largest cement player globally, excluding Chinese players. The deal
has also helped Jaypee Group, which can reduce its debt that runs into
thousands of crores of rupees.
Concrete Trouble
India’s largest cement-maker UltraTech Cements Ltd. (UT) had to call off
a Rs 5,325 crore deal to buy Jaiprakash Associates Limited’s (JP) two
cement plants in Madhya Pradesh (5 MTPA) as the Bombay High Court
rejected the scheme of arrangement citing the new MMDR Act as the
prime reason.
Under the Mines and Minerals (Development and Regulation) Act (MMDR
Act), mining rights do not get automatically transferred to a new owner
unless the acquisition is 100%. Ownership of mines can only be obtained
in auctions. Major cement companies are expecting an amendment in the
MMDR (Amendment) Act 2015, to allow the transfer of limestone mines
automatically to the buyers in case of mergers and acquisitions. 2
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Anatomy of the deal
INTRODUCTION

 This will be the largest deal in the Indian cement sector and it comes two days after
JP failed to get court approval for a transfer of rights to mine limestone in MP.

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 Possible structures

Considering various legal and compliance issues, the structure selected to transfer the
undertaking along with mining rights for executing the transaction effectively can change.
Structure below is based on the assumption that amendment in MMRDA Act will be
passed/ not passed-
If the amendment goes through
It is a clear asset purchase (including mining rights) which may be structured by
hiving off the entire cement capacity to be transferred into a step-down subsidiary
of JP and then 100% stake will be sold to UT.
Other option would be to directly sell the cement plants through slump
sale. Implications– In option A, there will be no implications on demerger of
cement division to 100% subsidiary but capital gains (Income Tax) on slump sale
based on the transaction value and the net worth of the divisions when the division
is sold.
If the amendment is rejected
The divisions can be transferred by carving out a separate entity that will own JP’s other
businesses, such as hotels, construction and real estate which will apply for listing. The
residual company left behind will own the cement division to be transferred which can be
merged with UT and sale proceeds to be given to the bankers to the extent of sale
proceeds of promoters holding. Implications– There will be no implications on demerger
of other divisions (hotels, construction and real estate), though promoters of JP will end
up paying some capital gains tax on the sale of shares.

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 What’s in it for UltraTech?

UltraTech Cements Ltd: The acquirer

Kumar Mangalam Birla’s cement flagship firm UltraTech Cement is part of the Aditya
Birla Group and a subsidiary of Grasim Industries with a total capacity of around
67.7 MTPA. It is the largest manufacturer of concrete in India and the largest
exporter of cement and clinker from India. UT accounts for a third of the Aditya Birla
Group’s market capitalisation.

1. Capacity: The deal will increase its installed capacity by a whopping 25% to
92.3 MTPA. UT will become one of the five largest cement makers in the world.
Capacity per share would rise from 0.25 tonnes/share to 0.32 tonnes/share.
EBITDA would reduce from around Rs. 68 crore/MTPA to Rs. 63 crore/MTPA.

2. Valuation comparison:

HENCE, BASED ON THE ABOVE FIGURES AND OTHER ANALYSIS, THE DEAL
VALUATION SEEMS TO BE IN THE FAVOUR OF UT.
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 INTRODUCTION

3. Market share: Access to markets in central India, where it has no presence.

Improve market share in the key northern, central and southern zones where its
presence is either weak or non-existent.
Market share will expand from 17% to 22% after this transaction.

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 INTRODUCTION

Fund Raising: Assuming the company finances the deal through internal accruals
of Rs 2,000 crore and funding the balance by 60% debt and 40% equity, its debt to
equity ratio would rise to 0.87 from 0.40 and equity would be diluted by about 7%
(assuming no preferential allotment). Alternatively, if it is assumed that deal is
financed entirely by debt then debt equity ratio would rise to 1.29.
Sustainability: Based on our calculations, capacity acquired for $132/tonne would
require $21.6/tonne in EBITDA to generate a Return on Equity (RoE) of 14%. By
contrast, the assets being acquired have reported an EBITDA/tonne of below
$10/t. UT reported EBITDA/tonne above $15/t, which is still lower than what
UTCEM is paying in this latest deal (to be EVA neutral).
Demand cycle at the cusp of acceleration, organic expansion getting costly and
time-consuming and complementary market reach offered by JP’s portfolio of 12
plants to its existing asset base creates strong strategic sense. Shareholder value
may decrease in the short term due to reduced EPS and increased debt equity
ratio. However, over the long term the company may reap the positive effects of
leverage.
Barring the increase in its debt and some dilution in earnings, UT appears to have
netted a good catch in JP’s cement assets.

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 INTRODUCTION

Barring the increase in its debt and some dilution in earnings, UT appears to have
netted a good catch in JP’s cement assets.
(Note: The figures above are calculated based on the operating capacity of
18.4 MTPA)

Amidst rising NPAs and CDRs, this one is a classic example of deals
driven by bankers forcing companies to deleverage the balance sheet by
sale of stressed assets

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 Jaiprakash Associates Ltd: The target

Noida-based Jaiprakash Associates Ltd. has a total cement capacity of 27.79 MTPA as on 31st March
2015.
After several failed attempts by JP to sell its cement business in the last two years, the lenders prevailed
upon the company to sell a lion’s share of its portfolio in one shot.
Rationale for JP
1. Outstanding debts and interest-If JP manages to sell the cement assets as per plan and utilise the
proceeds fully for repayment, it would be able to prune its debt from Rs 24,126 crore as of March 31,
2015, to about Rs 7,000 crore. It can also renegotiate the terms and conditions of existing and proposed
loans and advances.

2. Market value and piling losses- A huge debt pile have ensured that JP trades as a penny stock. As
of 26th February 2016, it had a market value of just Rs 1,637 crore (Rs 6.73/share). All the cement
companies and divisions of JP group are in losses eroding the net worth of the company.

3. Refinance- If MMRD Act gets the nod, the deal may also include a clause that UT will refinance JP’s
borrowings at lower rates. This will bring down the future interest obligations of the company.

4. Core concentration– JP Group is determined to leverage its expertise in the fields of engineering &
construction, real estate and project execution, in a committed manner and such steps would further
‘cement’ its credentials of being a trustworthy organisation in the long run.

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 Jaiprakash Associates Ltd: The target

The bad for JP

JP will lose its cement business which has been generating substantial cash
flows.
Pressure from the bankers and comparison to its earlier transaction with UT as
well as comparable indicate that the deal was slightly less favourable to JP.
Shareholders value is currently less and may reduce further immediately after the
sale but it may gradually rise in the long term due to concentration on core
businesses and deleverage.

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 Conclusion

The deal will help UT to accelerate its position further in Indian and global
markets and will ease off pressure on JP from the stakeholders and let it
concentrate on other core businesses.
JP may also transfer some of their debt to Ultra-Tech which means that lenders
now have exposure to a business group that’s regarded as being financially
sounder than many others, thereby reducing the risk of defaults and also
improving its capital adequacy ratio.
The proposed amendment regarding transfer provisions in MMDR Act will also
allow mergers and acquisitions of companies. It will also help improve profitability
and decrease costs of those firms that are dependent on the supply of mineral ore
from captive leases.
The transaction also highlights the growing trend of lenders putting pressure on
debt-laden business houses to sell assets and deleverage the balance sheet. Due
to rising non-performing assets in the banking sector, it is a purely buyers’ market
where the seller does not have much choice other than agreeing on the term
sheet offered by the buyers.

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UltraTech Cement like Dalmia Bharat has been on an acquisition hunt in recent past. In mid-2017, it acquired JPA’s cement pl
Both UltraTech and Dalmia are actively contesting the acquisition of Rajasthan-based Binani Cement, which has a capacity of
INTRODUCTION
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JPA is now planning to sell its residual cement business, with a capacity of 5.5 mtpa, for about Rs 5,200 crore. This deal come
In May last year, the Jaypee Group had agreed to sell a part of its central capacity to Orient Cement for Rs 1,946 crore but the

The ACC-JPA deal value is pegged at around Rs 5,200 crore for a cement capacity of 5.5 mtpa. This translates in an enterpris
The UltraTech-JPA deal, which closed last year, was valued much lower at $114 per tonne. The pending-NCLT Binani Cement
While the deal should help Jaypee Group reduce its outstanding debt, the acquisition by ACC should help strengthen compan
ACC operates in the central region though an integrated unit in Kymore (MP) and grinding unit in Tikaria (UP). Ramp-up of JP

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Besides gaining market presence, the deal should help ACC gain economies of scale. However, how much of an operating eff
 INTRODUCTION

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 INTRODUCTION

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 INTRODUCTION

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 LEGAL FRAMEWORK OF MERGER & ACQUISITION

Applicable to all companies including listed

companies

The Industry
Income Tax Competition Accounting RBI and
Companies Stamp Laws specific
Act, 1961 Act, 2002 Standards FEMA Laws
Act, 2013 regulations

SEBI (LODR) Regulations, Continuous listing

2015 obligation
Applicable only to
listed companies
Other Relevant SEBI Laws Back Door Listing

 On merger of listed company with unlisted company, the transferee company

shall remain an unlisted company until it becomes a listed company
Others

 Provision for an exit route for shareholders of the Transferor Company

 Payment of value of shares and other benefits in accordance with pre-

determined price formula or as per prescribed valuation
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 Merger Process under Companies Act, 2013

(For Listed Companies)

Considering Finalisation of Approval of the
Recommendation
proposal for Merger scheme of scheme and
on scheme and
and Amalgamation Amalgamation, valuation report by
valuation report by
by BOD’s of valuation and BOD of the
the Audit committee
Companies Fairness opinion Companies

On direction of NCLT, Notice

Convening of
Shareholders and
Creditors Meetings
for approval of
scheme and
discussion report to
NCLT
•If creditors having
at least 90% value
agree and confirm
by way of affidavit
to the scheme,
then NCLT may
dispense creditors
meeting
of the meeting and copy of
valuation report has to be Filling of Filing of scheme,
sent to share holders. Application to NCLT Valuation report and
Creditors and CG, IT, SEBI, (disclosure through Fairness opinion
ROC, OL, Respective stock affidavit if reduction with the designated
Exchanges of Share capital is Stock exchange for
•*Notice shall also provide part of scheme) SEBI approval, if
an opinion to vote through Co. is listed
postal ballot. •Uploading of
scheme, valuation
•Notice also includes the report and Fairness
effect scheme on KMP’s, opinion on website
Creditors, promoters of the Co.
members and also disclose
interest of Directors ,
Denture Holders.

Notice to regional
Obtaining NCLT
director and official Final hearing by Post Merger
Order and filling
liquidator and NCLT Compliances
with ROC
submission of their
NOC with NCLT

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 Fast Track Merger

SMALL CO. FAST TRACK MERGER HOLDING CO.

SMALL CO.
WHOLLY OWNED SUB CO.

Small Company means Company other than Public CO. having Paid up Capital not more
than Rs. 50 Lakh and TURNOVER not more than Rs. 2 Crores. (Govt. can raise the limits)

Central Government has the power to sanction the scheme, no requirement to approach NCLT

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 Fast Track Merger Process under Companies Act, 2013

Notice of Proposed Filing of

Considering Scheme would be given Declaration of
Approval of the
proposal for to ROC, OL and any solvency with the
Finalisation of Scheme by
Merger and other person affected Registrar of
Scheme of Board of
Amalgamation through scheme for Companies (RoC)
Amalgamation Directors of the
by BOD’s of their objections and along with the
Companies
Companies Scheme of
suggestions Arrangement

ROC and official

Issue of notice
liquidator to Meeting of the
by Transferor
provide their No Filing a copy of shareholders
and Transferee
Objection or scheme and Filing the copy of Scheme along and Creditors of
Company for
suggestion on Notice of with the result of each meeting the Company
convening the
the scheme to Objection and with the Central Government by for scheme
meeting of the
Central Suggestion to :- the Transferee Company approval with
members and
Government ROC and OL requisite
creditors and
within thirty majority
notice
days of receipt.

Central Government may

Central Government to consider the objection and File copy of the
refer the scheme to NCLT
suggestion of ROC and OL and if central government is order with the
for considering the
of the opinion that scheme is in the public interest or in Registrar of the
scheme under Section 232
the interest of creditors, the Central Government shall Companies in e
of the Companies Act,
issue a confirmation order. Form INC 28
2013 as a normal merger.

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 Fast Track Merger (Cont.)

Applicability
 Scheme of merger between holding company and its wholly-owned subsidiary company; or

 Between two or more small companies (not applicable for listed companies).

Features
 Section 233 of Companies Act, 2013 provide for the fast paced merger mechanism for the class of
companies mentioned above ;

 Requirement to go to NCLT for sanctioning of scheme of arrangement has been done away with for Listed
Company involved;

 No requirement of Observation Letter/ No objection letter from SEBI;

 Objections only from Registrar and Official Liquidator (and from no other authority/regulator)are invited as
envisaged in the provisions;

 If opined to be against public interest, NCLT may order merger in normal course, that is, through NCLT
route;

 Equally applicable to Demergers and other schemes of arrangement.

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 Fast Track Merger (Cont.)

UNDER COMPANIES
CROSS BORDER MERGER
ACT, 1956

Indian Company
Foreign Company (can be (Only can be
only Transferor/Target Co.) Transferee/acquir
er Co.)

UNDER SECTION 234,

COMPANIES ACT, 2013

Foreign Company Indian Company

Notified by CG vide  Now Indian Co. can be Transferor as well as Transferee co.
Notification dated  Prior approval of RBI is also required for both Inbound and
April 13, 2017 Outbound merger

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 Impact Analysis of Fast Track Merger
+ _
 Encourage corporate restructurings for small
and group companies
 Will result in faster disposal of the matters
 Only relevant cases would go to NCLT
 No need of separate RBI / IT approval or SEBI’s
No objection letter
 Provisions of valuation by Registered Valuer are
not specified
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 Approval required from majority of
each class of Creditors holding 90% in
value, may be difficult especially from
trade creditors
 There is no clarity on which person to
be considered as affected by the
scheme for giving the notice
 No clarity, what shall be impact of
objections, if any
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 Cross Border Merger

Impact Analysis
 Flexibility for company structuring overseas. Cross Border restructuring will increase
 Exit opportunity for Non-resident investors
 Opportunity for Indian companies to form corporate strategies on a global scale
 Scope of Outbound mergers restricted to notified jurisdictions – includes all major economy
including UK, USA, Singapore, Mauritius, Netherlands etc.

Features
 Outbound Mergers subject to specified jurisdictions;
 Prior Approval of RBI required in both cases;
 Compliance with Section 230-232 of Companies Act, 2013 compulsory – Filing with NCLT mandatory;
 Valuation by recognized Valuer by Transferee Company a pre-condition for outbound mergers;
 Declaration to such valuation to be filed with RBI;
 Payment of consideration to the shareholders of the merging company in the form of cash or
depository receipts or partly in cash and partly in depository receipts

Critical Issues
 In case of Outbound Mergers, Practical issues relating to the status of company in India including
ownership of assets and properties in India;
 Tax Neutral Transaction and Tax Treaties with various countries;
 Other Regulatory aspects in the counter party countries.
 No Fast Track Merger provisions.

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 Merger Tax Laws

Section 2 (1B) of Amalgamation, in relation to companies, means the merger of one or

Income Tax Act, 1961 more companies with another company or the merger of two or more
companies to form one company in such a manner that—
Condition 1: all the property of the amalgamating company or companies immediately before the
amalgamation becomes the property and liabilities of the amalgamated company by virtue of the
amalgamation.
Condition 2: all the liabilities of the amalgamating company or companies immediately before the
amalgamation becomes the property and liabilities of the amalgamated company by virtue of the
amalgamation.
Condition 3: shareholders holding not less than 75% in value of the shares in the amalgamating
company or companies (other than shares already held therein immediately before the amalgamation
by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the
amalgamated company by virtue of the amalgamation.
otherwise than as a result of the acquisition of the property of one company by another company
pursuant to the purchase of such property by the other company or as a result of the distribution of
such property to the other company after the winding up of the first-mentioned company ;
When its Amalgamation within the meaning of
Section 2(1B) Income Tax Act, 1961
 Carry forward and set off of accumulated loss and unabsorbed depreciation allowance
 Capital Gains Tax Exemption
 Amortisation of Preliminary Expenses
 Capital Expenditure on Scientific Research
 Expenditure on Acquisition of Patent Right or Copyright
 Expenditure on Amalgamation , Expenditure on know-how
 Expenditure for obtaining License to Operate Telecommunication Services
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 Role of SEBI in Mergers & Demergers

Review & give Observation on Scheme before filing with NCLT:

 Scheme should be in consonance with SEBI Regulations
 Scheme should not be against the interest of minority shareholders
 Valuations should be fair to the shareholders of Listed Company
 No undue advantage to the Promoters or KMPs
 Proper disclosure of all the facts to shareholders to take informed decision
 In case promoters’ holding is increasing in Scheme, it is to be approved by Non-promoters through
Postal Ballot

Review & Give

Observation on Scheme
before filing
Regulation 37 of SEBI with NCLT
(LODR)
Regulations, 2015 Grant exemption from
Rule 19(2)(b) of SCRR
for listing of Resulting
Company in case of
demerger

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 SEBI Latest Development

Fast Track Merger in true sense

Exemption from filing with SEBI Merger of Wholly-owned subsidiary

and its observations thereof with Parent Company

Allotment of shares to select group of Pricing applicable to Preferential

shareholders or shareholders of unlisted allotment under SEBI (ICDR)
companies pursuant to merger Regulations.

Allowed only if listed company is listed on Stock Certification by

Where Unlisted Exchange having nationwide trading terminal Registered
Company is being Merchant Banker
merged with Listed in respect of
Company Disclosure of material Information by the unlisted accuracy and
company as per the format of abridged prospectus adequacy of
disclosures

Disclosure while filing documents with

Disclosure in the Notice &
Stock Exchange(s) for SEBI’s
Explanatory Statement sent to
observation letter as per revised
Shareholders
formats

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 Competition Act Provision

The Law of M&A and Competition Law are intrinsically bound with each other, as every M&A has to undergo
the process of Competition Assessment under the relevant provisions of the Competition Act, 2002 and the
allied Regulations.
Regulatory Framework for Merger Control:
The Regulatory framework for merger control is provided under the Competition Act, 2002 and under
the Competition Commission of India (Procedure in regard to transactions of business relating to
Combinations) Regulations, 2011.

Notice for proposed combination

Section 6 of the Competition Act mandates that any enterprise which proposes to enter into a
combination and satisfies the threshold limits as enumerated above shall send a Notice to the
Commission in the prescribed form and along with the prescribed fee.
Investigation of Combination
Where the Commission is prima facie of the opinion that the proposed combination is likely to cause
appreciable adverse effect of competition (AAEC) in the relevant market, then the Commission shall
issue a show cause notice to parties to show as to why investigation with respect to such combination
shall not be conducted.
Order of the Commission on Combination
Section 31 of the Act provides for the orders of the Commission on certain combinations. The orders
under this statutory provision can broadly classified as under:
Where the Commission is of the opinion that the combination is not likely to have an AAEC then it shall
by order approve the combination.
Where Commission is of opinion that combination is likely to have an AAEC then it shall order that
combination shall not take place.
Where Commission is of the opinion that combination is likely to have an AAEC but such adverse effect
can be eliminated by modification to such combination Commission may propose modification.
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 Foreign Direct Investment

FDI is governed by RBI’s following regulations:

1. FEMA Guidelines Foreign Exchange Management Act 99

2. FDI Regulations

Apart from RBI FDI also governed by DIPP (Department of Industrial policy and promotion) directives
issued by SIA (Secretariat for industrial assistance) in the Ministry of Commerce and Industry.
The Foreign investment scheme are implemented by the FIPB ( Foreign Investment promotion board),
unit of ministry of Finance and RBI.
Ministry of Commerce
RBI Ministry of Finance and Industry

FIPB DIPP

FEMA

FDI Regulation

Role of RBI in Cross Border Investment

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 THANK YOU

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