What downturn? Birla goes on a shopping spree

Abhineet Kumar &Shubhashish
Business Standard
16 July 2012

With six acquisitions in a little over a year, and an emphasis on integrated value chains, Kumar Mangalam Birla has charted out a bold expansion path for his group

After two big-ticket acquisitions in 2011 within a gap of a mere 10 days, a journalist asked Kumar Mangalam Birla: "Are we meeting again next week for a new acquisition announcement?" Birla chuckled and said: "No, now you won't be hearing such news from us for quite some time." The group went on to make three more acquisitions.

Birla has kept his foot firmly pressed on the accelerator for the past two years, with the aim of doubling his group's revenue to $65 billion by 2015. The ambition is to maintain global leadership in the group's traditional manufacturing businesses, such as Viscose Staple Fibre (VSF), and also gain a leadership position in service sector ventures, such as retail. "The downturn has given us an opportunity for consolidation and growth in new markets; so, for the past two years, we have been establishing our globalisation trajectory," says Dev Bhattacharya, group Executive president, corporate strategy and business development, Aditya Birla Management Corporation. "The rationale behind the global expansion is to get an advanced supply chain, the right technology and efficient brands," he adds.

That vision is reflected in the acquisition this month of Canadian Terrace Bay Pulp Mill for $300 million ($44 million for the plant and some $250 million in plant upgrades) as well as Swedish specialty pulp-maker Domsjo Fabriker for $340 million around a year ago. These buys are critical for ramping up the VSF business, which enjoys a 21 per cent market share globally and which Birla considers a core part of what the group does.

K K Maheshwari, a veteran of the group who had earlier headed the chemical and commodity trading business, was entrusted with the pulp and fibre concern two years ago, with a mandate to take the production to one million tonnes from 700,000 tonnes. "For the pulp business, it was tough to grow organically as setting up pulp plants is a very long process. So, it has been a conscious decision to expand inorganically," says K K Maheshwari, managing director, Grasim Industries.

For the fibre business, where it is not difficult to set up a plant and grow quickly, the company has decided to invest $500 million in Turkey to build a 180-ktpa, fully-integrated VSF plant. Besides, there are other greenfield and brownfield expansions to achieve the target. It also helps establish what Bhattacharya calls a 'globalisation trajectory', as the group's VSF business pans across six countries — Canada, Sweden, Thailand, Indonesia, China and India — and will now add Turkey to its geographical presence.

Another big-ticket acquisition: A controlling stake in Kishore Biyani's apparel retail and fashion chain, Pantaloon, for about Rs 1,600 crore. Acquirer Aditya Birla Nuvo is already a leader in the branded garments segment in the country through its subsidiary Madura Fashion &Lifestyle. "The deal gives Aditya Birla Nuvo's retail plans a further fillip and is a value-creating deal for all stake holders," says Vishal Kampani, head of institutional securities group at J M Financial, investment bank that advised the group on the acquisition.

The Birla group, which has always believed in integrated value chains, will be able to further its forward integration in fashion retail with this acquisition. Madura already has a valuation of over $1 billion and generates total sales of Rs 2,145 crore from its 1.6-million-square-foot retail space. "The proposed acquisition is in line with our strategic intent to be on top of the league, and to c;reate the largest integrated, branded fashion player in the country through an extension into the value segment," says K M Birla, chairman of the group, regarding the acquisition of Pantaloon.

Kishore Biyani, the poster boy of India's organised retail industry, had called Kampani for help in de-leveraging the Future Group's balance sheet and wanted to get into a strategic back-end tie-up with the Aditya Birla Group. In the first meeting itself, Birla told Kampani that high margins and private labels of the Pantaloon fashion business made it an attractive fit. Biyani, however, said that Pantaloon was the last business he wanted to sell.

But Birla's humble persuasion and his personal equation with Biyani made the deal happen. Of course, smart structuring in which Biyani got to retain equity, management access and yet was able to retire debt, worked in Birla's favour, giving him a pole position in fashion retailing, thirteen years after he entered the business by buying Madura Garments.

In fact, after taking the reins of Aditya Birla Group, following the death of his father Aditya Vikram Birla in 1995, Madura Garments was the first high-profile acquisition that K M Birla made in non-core businesses. This was also his bid to expand from the manufacturing businesses to consumer-centric ones. Under his leadership, the group has made around 27 buyouts to secure raw materials, market access, market share and new technology.

Jacob Mathew, managing director, MAPE Advisory, recollects working for K M Birla on the Madura Garments deal in his earlier stint with DSP Merrill Lynch: "The hallmark of Mr Birla is the power to stay back…Many termed Madura's as well as Novelis' acquisition expensive deals, but his ability to turnaround acquisitions and fully integrate those is what makes him stand out and be successful."

Another acquisition the group made this year was a 27.5 per cent stake in Aroon Purie-controlled Living Media India, a holding company that owns 57.46 per cent stake in TV Today Network and publishes a host of magazines, including India Today.

This is generally considered a desire of the group to enter the media industry. Earlier, it had forayed into the entertainment business by launching a movie and television software production company, Applause Entertainment. The company is best known for producing the Hindi movie 'Black', which starred Amitabh Bachchan. It shut shop in 2009.

While Birla's focus has been to rank among the top three in the group's flagship businesses, he has also been trying to c;reate the right mix through these acquisitions. This means that asset-heavy, old-economy companies with high cash flows are able to fund the service sectors of new economies. The investment in Living Media can be seen as an effort in that direction.

Birla's strategic ambitions, relentless persuasion and the power to stick with his decisions are bound to keep bankers busy for a while.

Dealmaker

2012

• April: Majority stake in Pantaloon Retail chain from debt-laden Future group for Rs 1,600 cr
• May: 27.5% stake in Living Media India, which publishes India Today and Business Today magazines — didn't disclose deal size
• July: Canadian Terrace Bay Pulp Mill for $44 mn; to spend further $250 mn to upgrade and expand the plant

2011

• January: 100% stake in Columbian Chemicals Company, an Atlanta-based carbon black maker, for $875 mn
• April: 33% stake in Domsjo Fabriker for $340 mn
• April: Aditya Birla Chemicals acquires the chloro chemical division (100%) of Kanoria Chemicals and Industries for Rs 830 cr