Grasim Industries, Acquires 40% stake in sick pulp manufacturer :Nomura research

Grasim Industries has announced an acquisition of 40% stake in a
distressed pulp manufacturer Terrace Bay Pulp, Canada. Another 60%
has been acquired by an Aditya Birla Group entity Thai Rayon. While
further details have not been revealed, Grasim will infuse USD44 mn
over a three year period into Terrace Bay out of a total equity
requirement of USD110 mn. At this moment the mill is shutdown after an
explosion in its plant in Oct’11 further weakened an already weak
financial position and will be restarted by Oct’12. Terrace Bay at this
moment has been placed under credit protection by Canadian
authorities.

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Till now the mill was producing paper grade pulp with a capacity of
550,000 tonnes per annum and over the next 3-4 years, the mill would
be converted into a 280,000 tonnes per annum dissolving pulp grade
manufacturer to supply VSF manufacturers like Grasim. This would
require an investment of USD250 mn in total. Terrace Bay currently has
total assets of USD46.3 mn and has debt of USD54 mn from Ontario
province and unsecured creditors.
This acquisition is in-line with Grasim’s intention to vertically integrate
and have an in-house supply of pulp for its VSF business. Grasim is
expanding its VSF capacity by 156,500 tonnes per annum or by almost
50% of its current capacity in India by end of FY13 apart from creating a
Greenfield capacity in Turkey. We believe more acquisitions of pulp
manufacturers are likely to come through in the future as the current inhouse
pulp capacity is sufficient only for ~75% of Grasim’s current
capacity. Grasim’s has USD430 mn of cash on its standalone books and
almost USD1 bn of cash on its consolidated books which would be more
than sufficient for this acquisition and further acquisitions. Grasim in
May’11 had acquired 33% stake in Domsjo Fabriker, a Swedish pulp
manufacturer for USD62 mn apart from further investments. Grasim
does not necessarily ship pulp from these countries to its plants in India
but hedges its purchases from nearby pulp manufacturers through sales
from its acquired entities to other VSF manufacturers.
We do not expect any significant reaction by the stock to these
acquisitions and at current levels after rallying 20% in the last one
month we expect the stock to look for an upward movement in VSF
prices or cement prices/volumes to further outperform.