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Sweet & Sour Solution

Bajaj Hindusthan’s Balrampur Chini bid got crushed before take-off

Bitterness had spilled over and out of the sweet world of the sugar barons onto the streets. Bajaj Hindustan, India’s largest sugar company, was reportedly interested in taking over its nearest rival Balrampur Chini, eyeing a 37 per cent stake. The latter’s promoters were willing to sell at the right price to anyone who was willing to buy at their rates. 

While both companies had maintained a cloying silence on the matter, yet this had not prevented analysts from venting their ideas about the consequences of a takeover bid.

The deal was tethered to a tight schedule as it had to be inked before the new crushing season began. But just when everyone had assumed that the announcement   for the takeover would finally be made, the exact opposite happened. The deal fell through.

Reportedly, the reasons were as wide and varied as the expectations of the analysts’ projections for the merger — from the Securities and Exchange Board of India’s (SEBI) takeover code (Bajaj Hindusthan did not want to entertain the possibility of triggerring an open offer), to an unwillingness to pay in a lump sum, but through staggered payment, has made the rounds. This left Balrampur Chini nowhere to go as others in the fray like US’ BUNGE and Singapore’s Olam International were not very keen to enter the Uttar Pradesh area.

The Indian market is dominated by four sugar makers: Shree Renuka, Bajaj Hindusthan, Triveni Engineering and Balrampur Chini. Out of these, Triveni derives a large part of revenues outside the sugar sphere, from steam turbines units, which essentially leaves three key players in the business.

Undoubtedly, if the reported bid had become successful, it would have had industry changing potential with a pan-India impact. This encouraged many media pundits and analysts to jump into the fray to indicate and unravel the intricacies of the deal. However, it does not seem to  have created a consensus  among the industry-watchers or others about the emerging situation. Yet a thoought that no one seemed to have entertained was the possibility of a dud deal. Considering that Balrampur Chini’s stock jumped from Rs 105 to Rs 160 last week, many investors must be feeling short-changed. We track here the various permutations of the deal vented by the media and showcase some of the more relevant ones.

Case 1
Last year both Bajaj Hindusthan and Shree Renuka had similar consolidated revenues of around Rs 2,100 crore and sales from sugar business of around Rs 1,800 crore. But a Bajaj-Balrampur merger would alter the landscape. The combined entity would have created a giant with revenues exceeding Rs 3,000 crore and a capacity of more than 200,000 tcd (tonnes crushed per day).

The acquisition would make Bajaj Hindusthan’s revenues shoot up by over 70 per cent on an annualised basis. Sugar business of the combined entity would be 50 per cent more than the number two, Shree Renuka.

The recent changes in sugar pricing policy would bring parity between sugar producers in the North and South of the country. The potential of the combined entity would be more potent in profit generation than Shree Renuka, which has been reaping the advantage of better margins till now. (Source: vccircle)

Case II
The deal is being structured in a way that the takeover code does not get triggered into an open offer. Balrampur’s mills are likely to be spun off into a separate company, and the newly created firm transferred to Bajaj Hindusthan in an ‘all-stock deal’. This step may evade the takeover code. (Source: LiveMint)

Case III
At current valuations, Bajaj Hindusthan may have to fork out over Rs 2,000 crore to buy out the promoter’s stake in Balrampur Chini. The issue here could be that, Bajaj Hindusthan has a debt of Rs 3,000 crore on its balance sheet and it would be challenging for the management to raise this amount. (Source: Business Standard)

Case IV
While takeovers have always been a tried and trusted method of growing a company, in the sugar industry, size stops being relevant after a point. But if size is not it, then what? Since both have been engaged in a virtual war over the years, if one company is successful in taking over the other, it will give it a breather from the extremely taxing no-win contest. But the biggest takeaway for the buyer would be that it would increase the winners ability to bargain with the government and the growers. With a clear No. 1 player emerging, having a monopoly over cane in U.P., the industry would be altered forever. (Source: BusinessLine)

Footnote: While the deal is dead and buried for all intents and purposes, there still remains the fact that the Balram Chini promoters wanted out. Since that would not have changed, perhaps all that has happened is that the inevitable has been postponed to a more auspicious period.

Unsavoury Situation

  • Over several years, cane area and production have been declining over issues related to price and delayed payments.
  • The sugar cycle is in a boom period after two years and prices are ruling at all-time highs owing to a widening demand-supply gap.
  • Production is not being able to keep pace creating a supply/demand mismatch.
  • The situation has been worsened as the sugarcane crop has been damaged. In South India, North Karnataka, over 66,022 hectares has been partly damaged due to heavy unseasonal rains and subsequent floods. In North India, drought has raised prospects of falling production.
  • An ongoing disagreement between U.P. farmers and millers is pushing the sector to a volatile standoff. The farmers want a price of Rs 280 per quintal from the sugar mills on account of high production cost considering this year’s drought, while sugar mills are sticking to a Rs 130 priceline.
  • The tug-of-war has not stopped most companies from reporting a sharp jump in profitability leading to their stock touching new 52-week highs.