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Birla To Rejig Promoter Cos Ahead Of Vodafone Idea Issue

Ahead of Vodafone Idea’s $3.6 billion rights issue, Kumar Mangalam Birla is reorganizing unlisted group companies to raise funds, said people with knowledge of the matter.

SKI Carbon Black Mauritius Ltd (Birla Carbon) is set to buy a controlling interest in Swiss Singapore Overseas Enterprises Pte Ltd for $450 million. Both are promoter companies of the Aditya Birla Group chairman. Birla owns 100% of Kiran Investments, which owns these entities.

Carbon Black is said to be in talks with banks to raise short-term debt of $300 million and $150 million. It has also sought relaxation in loan covenants from 3.5 times debt to Ebitda (earnings before interest, taxes, depreciation, and amortization) to 4.1-4.2 times, said the people cited above.

Axis Bank, Standard Chartered Bank, Bank of America Merrill Lynch and Citi are believed to be funding the acquisition. An independent valuation will determine the controlling interest that will get transferred.

An Aditya Birla Group spokesperson declined to comment.

As co-promoter, Birla and the group companies are to contribute Rs 7,250 crore to the rights issue. Vodafone Group intends to pitch in with Rs 11,000 crore.

The funds from SKI Carbon will be up-streamed to Kiran Investments, one of the apex promoter entities of Idea. Aditya Birla Group owns 26.54% of Vodafone Idea, held through Grasim, Hindalco and Birla TMT Holdings, among others.

The rights issue is expected to provide the company with ammunition for about two years in the highly competitive sector, analysts said. Vodafone Idea’s debt was Rs 1.24 lakh crore at the end of December. Finance costs were about Rs 7,750 crore each in the past four quarters and losses in that period added up to Rs 10,700 crore. And, coming up is the 5G spectrum auction.

“Bankers are increasingly getting wary of funding Idea’s losses. As a promoter too, his flexibility is getting crimped,” said an executive with one of the lenders to the group. “Earlier, Birla relied heavily on Essel Mining, another private company, as his key money spinner. But following the mining ban and regulatory crackdowns, Essel has lost much of its earlier sheen.”

The worry is that group financials are being stretched to support telecom, experts said. Birla Carbon still has some headroom left but the use of proceeds will create an overhang as it already has on Grasim and Hindalco, they said.

According to Fitch Ratings, the positive outlook of the company’s credit ratings is on the expectation that Birla Carbon’s leverage will improve over the next few years, after increasing in the financial year ended March 2019 due to a large payout to shareholders and other entities.

SKI Carbon Black raised about $500 million in debt during the Idea-Vodafone merger. With this round, it will nearly touch a $1 billion.

Its revenue has fluctuated historically along with carbon black prices, which move in tandem with the underlying feedstock—carbon black oil. Ebitda has declined since 2012 on the back of global oversupply. In FY16, it fell 40% because of an increase in supply from Chinese producers with low-cost carbon black products, which led to a drop in global operating utilization levels to 75-80%.

Private jewels

The Aditya Birla Group had previously explored the idea of merging Essel with Hindalco for additional financial support after the 2007 Novelis acquisition, according to those with knowledge of the matter. Hindalco eventually made a success of the purchase, generating $350-400 million of free cashflows every year and went on to acquire Aleris for $2.58 billion in July 2018 to become the leading value-added aluminum maker globally.

Incorporated in 1978, Swiss Singapore is a leading bulk commodity trader dealing in various metals and minerals (coal, oil, sulphur, caustic soda), agro commodities (pulses, beans) and fertilizers across the world for group entities as well as third parties.

SKI Carbon Black is one of the world’s top three producers of carbon black with an 11% market share by value, behind Cabot Corp that commands a 21% share. The top three companies account for 40% of the estimated $15 billion global carbon black market. The rest of the market is fragmented, with many small companies competing at the regional level.

Birla is betting on the telecom sector normalizing soon, which makes the success of the rights issue crucial. Idea will have nearly Rs 20,000 crore in debt maturing before FY21.

“Completion of Vodafone Idea’s announced deleveraging initiatives—rights issue and potential asset divestments of tower and fibre network—would help the company address potential funding shortfalls in the near to medium term, all else equal,” said Manish Adhukia and Manish Mubayi of Goldman Sachs.

“However, our analysis suggests leverage (net-debt-to-Ebitda) by FY21E is likely to remain at >7x, given its elevated capex/interest payments and resulting negative free cash flows (FCF); we forecast FCF for Vodafone Idea to stay negative at least until FY23E.”

Vodafone India merged with Idea Cellular on August 31 last year, making Vodafone Idea the country’s biggest phone company. It has a subscriber base of about 387 million and a revenue market share of 36%.―Business Telegraph

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