India’s largest tyre manufacturer Madras Rubber Factory (MRF) is eyeing to buy the tyre unit of Kesoram Industries.
The two are in talks for a purchase at a value far above than the market capitalisation of the entire diversified Birla conglomerate that owns Kesoram.
The deal, once completed will be the 69-year old MRF’s first ever acquisition and consolidate its manufacturing presence in the north Indian market. It will also help to get a stronger grip over the commercial vehicles tyre segment, where it is the second largest player after Apollo Tyres.
For Kesoram, selling its principal unit in Laksar, Uttrakhand, would deleverage its balance sheet significantly since it has been burdened by a ballooning debt pile of Rs4425 crore at end of the Sept 2014 quarter and it has posted losses for the last four consecutive years in the last four year, according to the Bloomberg data. It will also free up working capital for other operations. The tyre business contributed almost half of its FY14 EBITDA.
This is part of its plan to restructure its business. In a recent communication to the stock exchanges, the company said that it is exploring options for reorganising and realigning its existing business.
The release stated that to evaluate the reorganisation of the company’s business, the company has constituted a core committee of three directors, comprising two independent directors.
Analysts say the decision to sell its tyre business seems to be sensible and lucrative one given the fact that in the recent rally the fortunes of tyre companies have changed considerably with their share prices zooming up in the range of 20-113%.
An analyst said, “Tyre business seems to be crown jewel for the company presently as tyre stocks has been re-rated on possibility of the demand level. Given the fact that the company has nearly 15% market share in medium and heavy commercial market, it can command better valuation from potential bidders. This could be critical to pare down its debt levels”.