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Essel Mining driving Aditya Birla Group’s acquisition strategy

With a registered office in Kolkata, the $1.5-b Essel Mining & Industries started operations in the 1950s

It was 2007 and the commodity markets were on a roll. Indian companies were upbeat and one of the major reasons was that Tata Steel had snapped up Anglo-Dutch steelmaker Corus, seven times its size, for $13 billion. Barely a couple of months later, came another big surprise; the Aditya Birla Group, after a closely fought contest with global biggies, bought out Canada’s Novelis, one of the world’s largest rolled aluminum makers, for $6 billion.

India was now truly on the global map. But what caught attention in the Novelis deal was that Essel Mining & Industries, a little-known, unlisted, closely-held company within the Birla fold, had extended $300 million (then about `1,350 crore) in equity, to fund the acquisition of the Canadian major.

This made the industry sit up and take notice. Soon it emerged that Essel has been driving most of Aditya Birla Group's transactions serving as a holding company for the group, and leading the business family's efforts to ramp up promoter holding in companies, that were as diversified as aluminum and telecom and financial services.

“Essel was a strong supporting factor in the days leading up to the acquisition of Novelis,” said one of the members of the team involved in the Novelis acquisition. “The significance of having a company, almost 100% owned by the promoter, to bring in promoter equity, is enormous. It sends out the right signals that the group is serious,” he added.

And from financial projections made recently, Essel Mining is likely to continue that. It is expected to double its net profit to $1 billion by 2015, with cash flow likely to act as a cushion for the group's various future plans. “Sales of iron ore have been strong and as prices of the mineral are also firm, the company is likely to double its earnings,” explained a senior group executive who is privy to Essel Mining’s financials. Being unlisted, it is not mandatory to file its financial information.

But not much is known about Essel, a major driver of growth for the Birlas, the leading business group of India. With a registered office in Kolkata, the $1.5-billion Essel Mining & Industries started operations in the 1950s when the group was much smaller. Through a chance transaction with an Odisha-based mining magnate, Shyam Lal, the company acquired mines with proven reserves of 300 million tonnes of high grade iron ore in the Barbil-Barajamda belt of Keonjhar district in Odisha. The consideration for this acquisition is still not known.

“Last year we sold about 12 million tonnes of ore. Although there has been a fall in the past couple of months due to closure of some steel units in Odisha, we expect the government to take remedial measures and the business to grow,” said the group executive, adding that sales are likely to go up to about 16-18 million tonnes next year.

Mining accounts for 85% of the company's revenue. As China continues to remain a strong demand centre for iron ore -it needs the crucial raw material to make steel for its infrastructure projects — price of the ore will remain firm. From $25 a tonne in 2006, price of the mineral rose to about $55 and to $150 within three years. Jagdish Agarwal, a research analyst with Emkay Global Financial Services, says the group is upbeat on Essel Mining due to robust demand forecasts. “They have a strong management team at Essel and the fundamentals of that company are also sound. Demand for iron ore may have slackened due to overall economic sentiment, but the long-term potential is attractive,” he added.

Essel Mining as a cash-rich promoter company, that part funds the group's ambitious acquisition programmes overseas, also becomes evident in a recent transaction that the conglomerate closed. In January 2011, the Aditya Birla Group announced the acquisition of Colombia Chemicals for $875 million, a move that catapulted the group into the world's largest maker of carbon black, a key ingredient for making tyres and paints.

This acquisition was done through three different Aditya Birla Group units in Thailand, Egypt and Singapore to spread the pressure on the parent company's balance sheet. The financing was arranged with a collateral and guarantor group. The only common covenant that was asked for was that the Aditya Birla Group maintains 51% ownership and management control of the borrowers. Acquisitions have been the flavour of 2011 for the Birlas and Essel Mining has been a key backer. Since January-end, the group has stitched up three deals worth `6,300 crore. Apart from Columbian Chemicals, the group has also bought the chloro chemicals division of Kanoria Chemicals for `830 crore in April last and Swedish speciality pulp company Domsjo Fabriker for $340 million, again in April.

In an earlier interaction, Aditya Birla Group executive president Dev Bhattacharya had said that the group was backed by a strong vehicle to make global forays. “There are more opportunities available at realistic prices and the group is better positioned than many of its global peers financially (to make those deals),” he added.


Eye On Coal Mines

The company is currently on the lookout for coal mines. But with strong demand for coal having pushed up valuations, Essel Mining is now looking at a minority stake in foreign mines, with an offtake arrangement. “The group needs coal for its cement and aluminium operations. If the local supply situation is difficult, we will look at overseas mines,” says Ravindra Kastia, a director at Aditya Birla Management Corporation. Essel Mining has been in the race for a number of large mines in Australia, including the latest, New Hope Coal. But as the competition gets tougher, Indian companies will also have to look at smaller mines.

Essel’s search for coal mines follows recent concerns for Hindalco's greenfield projects. It was allotted a coal mine under its Mahan project, along with Essar Power which is under review by the ministry of environment and forests. “Since the Mahan coal project is still facing lot of uncertainties, the company may have to procure coal from the open market primarily through e-auction and import, adversely impacting overall costs,” said a recent report by Emkay Global Financial.

Having supported large group investments in manufacturing, Essel is now looking at other business areas within the conglomerate which require funds. Aditya Birla Retail recently said it will invest `1,500 crore over the next five years to expand its hypermarket and supermarket stores. Retail is a business that has seen sales grow in double digits but losses too have widened due to large investments.

Helping With Acquisition

In 2007, Essel Mining and Industries extended $300 m in equity to fund the acquisition of Canada’s Novelis, one of the world's largest rolled aluminum makers

Essel Mining is expected to double its net profit to $1 b by 2015, with cash flow likely to act as a cushion for the group's various future plans

Essel Mining as a cash-rich promoter co has funded the group’s ambitious acquisition programmes overseas

Since Jan-end, the group has stitched up three deals worth 6,300 crore. Apart from Columbian Chemicals, the group has also bought the chloro chemicals division of Kanoria Chemicals for 830 crore in April last and Swedish speciality pulp company Domsjo Fabriker for $340 m.

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