After 15 months of negotiations, the Aditya Birla Group has finally agreed to buy out the US firm Columbian Chemicals Company (CCC) for $875 million from One Equity Partners, the merchant banking arm of JPMorgan Chase.
This has catapulted the group to become the world leader in carbon black with a combined two million tonne annual production.
The move underlines a subtle change in Kumar Mangalam Birla, the group chairman's, M&A strategy.
Unlike the past, it's not just the emerging markets of Asia, West Asia or Africa that are the hunting grounds. The developed markets of Europe and US are equally attractive hot spots.
"Globalisation as a theme is gaining momentum. And internationalisation of business has become an integral part of that. It's also important from a de-risking point of view. It's an important part of strategy," Birla said in an exclusive interview.
"It is not that we are forfeiting our growth strategy in our home markets or where we are already present. Our carbon black business has grown the most among its peers here. But for technology, market and better product access, if we get a good asset even in the US or Europe or other developed markets, we will not shy away from a deal," explained a group executive who did not want to be quoted.
Kumar Birla has, in fact, opted for companies that are much bigger in size or scale. In 2007, the $2.6-billion Hindalco was game to buy the $11-billion Novelis, the boldest move then for Kumar Mangalam's career.
The Columbian Chemicals buy will not be a multi-billion dollar transaction, but like Novelis, CCC is more than three times the size of Birla's carbon black division in India.
Also just like Novelis, it fits into a similar strategy of inorganic growth for access to new products, markets and technology. Scale of operations dovetails perfectly in such a strategy. It is the same in aluminium, in cement and now carbon black.
It helped that Novelis, till recently panned by analysts as Birla's costliest mistake ever, has seen a remarkable turnaround. In that sense, it's been a huge confidence booster for the group, giving enough ammunition to conclude another deal in the developed markets of the US.
"On the back of a good experience, I am sure the psychology is more positive. Wouldn't deny that. But each business has to follow its own trajectory of growth," Birla said.
Novelis ended the 2010 financial year with an Ebidta (earnings before interest, taxes, depreciation and amortisation) of $754 million, its liquidity improved by $640 million to $1 billion, net profit stood at $400 million and sales at $8.7 billion. It was Novelis' best performance ever.
Around the same time as the Columbian negotiations, the world's second largest carbon black player Evonik entered the market. But finally for better complementary products, newer markets and cutting edge technology, CCC made the cut.
Aditya Birla Group now got access to 11 plants in nine countries, including markets like the US and South America or Europe, where, till date, it had no presence. CCC controls eight per cent of the world capacity of carbon black.
"We are one of the lowest cost producer of carbon black in the world. This acquisition gives us the best technology available globally. Therefore, we get the ability to have higher margins and offer more competitive pricing to our customers," he said.
Birla believes the buyout will create synergies for the group to the tune of $50 million every year on the account of sourcing of raw materials, economies of scale, among other things.
An offshoot of crude oil refining, carbon black is a key ingredient to the blackness in tyres and printing inks, toners, paints and conveyor belts.
Carbon blacks were originally derived from soot. Today they also make tyres more durable and have a host of other industrial applications.
But the rubber segment, that predominantly caters to tyre makers, is an overwhelming 93 per cent of the total carbon black market.
Columbian is not a profit making company, but from a strategic sense it makes sense for the AV Birla Group to go ahead and acquire this at a time when demand is much lower than global supply. The entire industry is growing at a 3-3.5 per cent on a CAGR basis.
Post acquisition, the group will be best suited to tackle the high growth markets in Asia and Latin America. By 2015, 61 per cent of global carbon black demand is expected from Asia alone.
"We are rubber players and they are speciality players. Also, they have a 47 member strong R&D team with 30 IPRs," said Santrupt Misra, CEO, Birla Carbon.
The acquisition will be carried on via the group's global associate companies such as Alexandria Carbon Black Company and the Thai Carbon Black Company Ltd along with SKI Investment, an investment arm of the group.
While the first two will each hold 21 per cent equity, SKI alone will hold the residual 58 per cent. These entities are raising the five year debt financing for the deal from a consortium of five banks ANZ, BankAm, HSBC, RBS and Standard Chartered.
Aditya Birla Nuvo, which houses the carbon black business in India, will not be a party to this deal as it has its own brownfield expansion plans in place, including a greenfield venture in Andhra Pradesh in the pipeline.
For the time being, CCC will remain a separate company just like the other international carbon black units of the group but in future, Kumar Mangalam may restructure the different units into one consolidated entity just like cement.
