RHI Magnesita (LON:RHIM) has announced the acquisition of the Indian refractory business of Dalmia Bharat Refractories Limited via a Share Swap Agreement, in exchange for 27 million shares in RHI Magnesita India Limited, a 70% owned subsidiary of the Group which is listed on the Bombay Stock Exchange and National Stock Exchange of India.
Dalmia Bharat Refractories
DBRL is one of the leading refractory producers in India with approximately 1,200 employees and production capacity of over 300 ktpa, from five refractory plants and raw material sites. DBRL recorded adjusted EBITDA of ₹945 million (€12 million) in the year to 31 March 2022 and had Gross Assets of ₹13,925 million (€170 million) at 31 March 2022.
Benefits of the Acquisition
The Acquisition will enable the Group to increase its presence in the high growth Indian refractory market, with forecast steel production growth in India of 12% in 2022 and a 7-8% CAGR until 2030. The production footprint (5 plants) and product offering of DBRL is highly complementary to the Group’s existing plant locations (4 plants) and product range with focus in the industrial segment, where RHI Magnesita is currently under-represented. Significant network benefits and margin improvement potential have been identified through the addition of production capacity in important industrial locations in the south and west of India, where the Group currently has no assets.
Under the terms of the Share Swap Agreement, RHI Magnesita India Limited will acquire all outstanding shares in DOCL in exchange for 27 million new shares in RHI Magnesita India Limited. Based on the closing share price of RHI Magnesita India Limited on 18 November 2022 of ₹645.35 per share, the Consideration Shares had a value of approximately ₹17,424 million (€212 million).
The Group will consolidate DOCL’s earnings and approximately €54 million of net debt held by DOCL through its majority shareholding in RHI Magnesita India Limited, resulting in a marginal increase in gearing at Group level. The Acquisition is expected to be accretive to Group earnings per share. Following completion of the Acquisition and the issuance of the Consideration Shares, the Group’s shareholding in RHI Magnesita India Limited will reduce from its current level of 70.2% to 60.1% and the Dalmia Bharat Group and minority shareholders in DBRL will hold a combined 14.4% stake in RHI Magnesita India Limited.
The Acquisition, which is conditional on the completion of the Business Transfer Agreement and Share Swap Agreement and other customary closing conditions, is expected to complete in Q1 2023.
Following the Q3 trading update announced on 19 September 2022, there has been a slippage of some orders towards the end of the fourth quarter and some weakening in the 2023 order book, in particular in Europe and east and southeast Asia. As a result of this change in the expected timing of shipments and associated customer payments, there is a risk that the Group may not achieve its target to reduce Net Debt:EBITDA by the 2022 year end to 2.4x, although a reduction from the 2.7x recorded at 30 June 2022 is still anticipated. The Group remains comfortably on track to meet consensus expectations for EBITA in 2022.
Commenting on the Acquisition, Stefan Borgas, Chief Executive, said: “I am very pleased to announce this highly value creating acquisition which will accelerate our development in the fast-growing Indian refractory market. It is another step in the execution of our Group strategy. We see material financial and operational benefits from the addition of the Dalmia Bharat Refractories business to our existing network, which will enable us to increasingly serve our customers with a ‘local for local’ approach in India and offer a broader range of products, in particular in the Industrial segment, in which RHI Magnesita is currently under-represented. This transaction demonstrates our ability to continue to grow our business in India where the outlook for the refractory industry is strong, at a time when demand in other geographies is weakening.”
Parmod Sagar, CEO and Managing Director of RHI Magnesita India, said: “As a trusted and reliable business partner, the integration of the Dalmia Bharat Refractories business into our network will underline our position as the leading player in the Indian refractory market. This transaction represents a strong commitment from the senior management of RHI Magnesita N.V. to continue strengthening the Group’s operations in India and to further expand our footprint in the region.”
Commenting on the transaction, Sameer Nagpal, Managing Director & CEO of DBRL said: “We were able to scale up the business over the last few years on the back of product breadth and service capabilities, establishing ourselves as a reliable Indian player. For the next phase of growth of this business it is imperative to have access to technology which RHI Magnesita, being a global leader, brings to the table. We believe our business can be optimally utilised to serve Indian customers by becoming a part of RHI Magnesita’s network.”
RHI Magnesita retained Deloitte Touche Tohmatsu India LLP as diligence advisor and Khaitan & Khaitan as legal advisors. DBRL was advised by Arpwood Capital as M&A advisor and Talwar Thakore & Associates as legal advisors.
RHI Magnesita is the leading global supplier of high‐grade refractory products, systems and solutions which are critical for high‐temperature processes exceeding 1,200°C in a wide range of industries, including steel, cement, non‐ferrous metals and glass. With a vertically integrated value chain, from raw materials to refractory products and full performance‐based solutions, RHI Magnesita serves customers around the world, with around 13,500 employees in 29 main production sites and more than 70 sales offices. RHI Magnesita intends to build on its leadership in revenue, scale, product portfolio and diversified geographic presence to expand further in high growth markets.