Jaypee's open offer to acquire Andhra Cements

Jaypee Group is making an Open Offer to acquire a stake in Andhra Cements. We, at DSIJ, have carried out an analysis that will help investors to make their decision about whether to opt for the Open Offer or not.

JDCL, a non-listed company of the Jaypee Group, is making an Open Offer to acquire up to 76315328 equity shares, which constitutes 26% of the expanded paid up equity share capital at face value of Rs 10 each. The offer would open on December 26, 2011 and close on January 6, 2012.

The Open Offer provides a short-term arbitrage opportunity to investors, as the price is fixed at Rs 12, which is at a 15 % premium to the market price of Rs 10 on the BSE. However, we believe that holding the stock from the long-term point of view will not benefit investors. An important point that is working against the company is its current loss-making financial condition, with a debt of more than 500 cr. It will take the company some time to turn this around into profits. Also, the expansion of capacity to 3.5 MTPA will take time to contribute to the revenues. Apart from this, the NSE has suspended the company's shares on Nov 3, 2011, due to non compliance with the listing agreement, which raise corporate governance-related questions. However, the company continues to trade on the BSE.

Andhra Cements, led by GP Goenka, is primarily engaged in the manufacture and sale of cement, with operations largely in the southern part of the country. The company has 2 operative plants, both in Andhra Pradesh, with an installed capacity of 0.80 MTPA and 0.60 MTPA respectively. It has further planned to expand its capacity by 3.5 MTPA. As per media reports, Andhra Cements has shut down its operations last year. In FY11, it reported losses of Rs 35.5 cr, with net sales of Rs 65.5 cr. Last year, the company was looking for an investor to fund the capacity expansion, but failed to find one due to liquidity crisis and its debt burden. The money which will be raised by the promoter will be utilised to revive, restructure and meet the operational requirements of the company.

About the Open Offer deal, Jaypee is acquiring a 66.7% controlling stake in Andhra Cements for Rs 234.7 cr. As per the documents filed by the company on the BSE, the stake will be acquired at Rs 12 with a premium of 15% based on the Tuesday, Nov 22, closing price of Rs 10. The stake will be acquired through a preferential allotment of 147 mn new shares. Along with the fresh shares, Goenka will be selling 48.15 mn shares from his current holding of 65.86 mn shares. This will be followed by an Open Offer in the current equity capital of the company to acquire 26%, i.e. 7.63 mn shares. The promoters will be left with a 6% stake in the company.

The cement industry itself is not doing well due to a slowdown in infrastructure and construction activity. Therefore, we would advise our investors to exit the stock and look for better opportunities.