TATA CHEMICALS: UK buy eases raw materials uncertainty

THE proposed acquisition of British Salt will fill a key strategic gap for Tata Chemicals. Brunner Mond, Tata Chemicals’ wholly-owned subsidiary in the UK, has signed an agreement to acquire British Salt for £93 million (. 656 crore approximately).
Brunner Mond was at risk of being hit by spurt in raw material prices after its supply contract with Ineos ends in 2016. By acquiring British Salt, it will have a captive and consistent source of raw material salt at reasonable cost.
The acquisition price that Tata Chemicals has agreed to pay for the acquisition is nearly six times the operating profits (earnings before interest, tax, depreciation and amortisation, or EBITDA) of the company. For a commodity chemicals company, this valuation is not cheap. However, the possible strategic synergies for Brunner Mond justify the pricing. The uncertainty over raw material supply at reasonable cost is eliminated for Brunner Mond’s UK operations. As British Salt starts supplying salt in a few months’ time, Brunner Mond’s raw material bill is likely to fall. Lastly, as the acquired company mines underground salt from its fields, the cavities created can be used for storing natural gas. Within five years, the new owners expect to generate gas storage business worth £45 million.
The acquisition will be funded through debt raised on the books of Brunner Mond and British Salt. British Salt’s is a high-margin business, with 45% to 50% operating profit margins and high cash generation, which will ensure easy debt servicing. Since the acquired company is profit-making, the acquisition will add to the EPS from the first year itself.
In this acquisition, Tata Chemicals has not repeated the mistake made while buying General Chemicals in the US in 2008. The pension fund liabilities in British Salt show a small surplus and there won’t be any incremental liability on this count on Tata Chemicals in future. In the case of General Chemicals, the incremental pension fund liabilities had put pressure on the company’s overall earnings for FY09 and FY10.
Tata Chemicals is back on a strong growth path after a couple of years of stagnation. Its acquisition of Rallis and foray into customised fertilisers are aimed at supplying a whole gamut of products to domestic farmers. While all these measures add to the corporate profitability, a mega-booster will come if it is able to double its urea capacity. The project continues to await firm gas allocations from the government.