With utmost respect for author’s views and even a greater respect for his attempt to make sincere efforts to point out as well as indirectly try to protect minority shareholders’ interest, I would like to present here my point-of-view on this deal.
– Privi acquisition was the result of an agreement entered into between Privi management and Std. Chtd. PE wherein Privi management had to provide an exit route to them with minimum fix IRR by the year 2016. Hence, this deal involved purchase of shares held by Std. Chtd. PE & affiliates for cash consideration of INR 220 cr. + Privi had an ~200 cr. CAPEX lined up for next two years so needed cash infusion so the deal also involved fresh equity issue for cash consideration of 150 cr…
Hence, in all, the deal required paying 370 cr. cash upfront.
– Now, as is pointed out in the said blog article, why this deal was not routed through listed Adi Finechem Ltd. ?? Where was the cash ?? Adi was a net debt company and had no net cash and Std. Chtd. PE required cash and not the shares of Adi Finechem Ltd…
– So, the second question arises asto why Fairfax didn’t choose to take pref. equity allotment route in listed Adi itself and therefore infuse 370 cr. cash in listed entity and then let it acquire Privi —
In case of such allotment at INR 350 per share (the rate talked in the said article), it would have involved further issue of 1.05 cr. equity shares to promoters which would have taken promoters holding to above maximum permissible 75 % as also triggered an open offer which was a time consuming process.
– Third question then arises asto why then Fairfax didn’t give low cost debt to listed Adi to fund this acquisition and let it directly acquire Privi —
In such a case what would have been the balance sheet of merged entity ?? 403 cr. net debt on Adi’s books and 96 cr. net debt on Privi’s books, so a net consolidated debt of ~500 cr. on consolidated FY16 sales of 780 cr. — how good was this ??
– Now, having looked at the constraints of routing the acquisition deal via listed entity, let’s have a look at pricing angle too which is the talking point in said article ----
Without Fairfax on board and as a key shareholder, would Adi (with 150 cr. TTM sales, ~15 % EBITDA and its key products facing headwinds in global market) quote at 23x TTM EV/EBITDA, 3.38x TTM EV/Sales and 45x TTM P/E ?? Markets already discount future beforehand and it was this impending deal of whom markets had got whiff of because of which this high price of listed entity was existent.
Now, let us assume that at 900 cr. privi acquisition is done instead of 725 cr. ; at that valuation, what would have been the multiples applied for Privi —
TTM EV/EBITDA = 11.64x
TTM EV/Sales = 1.58x
TTM P/E = 52.9x
Except P/E, which multiple seems unreasonable for an entity which is 4x listed Adi’s size and has consistent trackrecord of good profitability and most important has a great visibility of future growth to grow its topline at 14 % CAGR over next 3-4 years.
Yes, Privi has a clear visibility to reach INR 1050 cr. scale by FY20 barring unforeseen circumstances — how ??
– Unit III at Mahad which got operational in FY16-end is likely to contribute 60-70 cr. in first year and 105-110 cr. p.a. from second year onwards.
– Privi acquired specified assets of its job worker Yashashvi Rasayan in Bharuch, Gujarat for ~INR 25 cr. in FY16. Company is expanding capacities there at a cost of 115 cr.which is likely to get operational by FY18. Here, company will be manufacturing high value products like Menthone & its derivatives and in first year of operations it is likely to contribute ~110 cr. which will be gradually ramped up to ~300-320 cr. p.a. by FY20.
– In addition, with Privi acquisition, listed Adi has also got 3 patents lying under its wholly owned subsidiary Privi Biotechnologies. In collaboration with ICT & DBT, Privi Biotech is building a first of its kind unique facility at Nerul, Navi Mumbai which can facilitate R&D and pilot scale research with different types of agriculture bio-waste and convert it into value added products. First project is already getting set-up which is likely to get operational in FY18 which will involve manufacturing of food additives and non-food additives such as Vanillin, Xylitol, Gluconic Acids & Salts and Fatty Acids from second generation biomass like maize bran, rice bran, husk, paddy and non-edible oils. Once successful, the technology will, in probability be licensed to parent Privi Organics for commercial scale manufacture.
Now, with such great visibility on future profitable growth, even at 900 cr. valuation a 4x bigger size company was acquired at almost half the multiples at which smaller acquirer is quoted at.
– Agreed, Privi had generated negative -(180) cr. FCF in 11 years starting from FY05 till FY15 – however, it is FCF and not CFO – CFO in the same period is positive 186 cr. – higher than the yearly revenues of listed Adi.
– Privi has done a CAPEX of 360 cr. over a 11 Year period — 5 times that done by Adi over the same period,
– Privi’s Gross Block is 4x that of Adi,
– Privi net D/E without giving effect to 150 cr. fund infusion is 1.20 whereas after giving effect to 150 cr. fund infusion is 0.46 v/s Adi’s net D/E at 0.53
Now, look at other angle cited in said blog article asto entire business of Privi Organics was not transferred to listed entity ---- yes, as per info provided, a small negligible business of trading in inorganic chemicals is kept in Privi Organics — as per my understanding it is to keep Privi Organics in existence and later on merge promoter’s only other venture ‘Privi Lifesciences’ into it. Fairfax will be funding expansions planned there.
– So, is it that Fairfax acquired two companies by paying 370 cr. — may be, but even in that if we apply reasonable multiples based on TTM financials of Privi Lifesciences – FY15 Revenue 27 cr., FY15 EBITDA 5.1 cr., FY15 PAT 0.53 cr. with negative CFO — applying a EV/EBITDA multiple of just 12x and EV/Sales multiple of 2.3x, P/E becomes 99.84 and EV comes to 61.2 cr. of which 8.3 cr. is the debt on books so Fairfax would have paid 52.9 cr. if it wanted to acquire this business. So, in that case Fairfax acquired 50.8 % stake in Privi for 317 cr… Remember, here we have considered the most optimistic multiples which no PIPE deal-maker will pay.
To conclude, Fairfax paid 130 cr. to acquire 45 % stake in listed Adi and 317 cr. for acquiring 50.8 % stake in Privi (if we take possibility of Privi Lifesciences merger in fututre otherwise 370 cr.) – so, total acquisition cost for Fairfax’s stake in merged entity post Adi-Privi merger comes to 447 cr. (@370 cr. cost for acquiring Privi comes to 500 cr.) ---- interesting thing to note is if we exclude CCPS then Fairfax’s price per share in merged entity works out to be 354 per share (@370 cr. acquisition cost for Privi, works out to be 396 per share). Now, if we assume CCPS conversion without paying a single paisa, acquisition cost comes to 235 per share (@370 cr. acquisition cost for Privi, works out to be 263 per share).
Although author of the said blog and I have same intentions to protect minority shareholders’ interest, still, I don’t find any gross cheating done on Fairfax part in this deal. Yes – still the final structure is not known and minority shareholders will be cheated if –
– Cash of 150 cr. is not tranferred to listed entity.
– If the remaining business of Privi which will reside in unlisted entity and is not transferred to listed Adi is bigger than 10 cr. in revenue.
Rgds.
Discl. - Invested in Adi Finechem. Bought in the correction that came after the said blog article was posted.
