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Raghuvir Srinivasan

AMERICA'S Iran policy may be a stumbling block to progress of the Iran-India gas pipeline project but it has proved to be a catalyst for the largest corporate acquisition ever by an entity with an Indian connection.

The $5.7-billion (approximately Rs 25,000 crore) acquisition last week of Basell Polyolefins by a consortium that includes Purnendu Chatterjee's The Chatterjee Group was possible because the US did not wish to see the company falling into Iranian hands; National Petrochemicals of Iran was seen to be leading the race.

The deal has been signed and all that remains now is securing formal approvals from various statutory authorities before it is formalised by the end of this year.

The deal holds enormous significance for India and its petrochemicals industry, which is quite strong, with the likes of Reliance Industries, Indian Petrochemicals Corporation and Haldia Petrochemicals, part-owned by The Chatterjee Group.

The Toyota of petrochemicals

Basell is the Toyota of the global petrochemicals industry. It is a pioneer in large-volume manufacture of speciality polymers and commodity plastics such as polypropylene and polyethylene. Like Toyota, it is a technology leader and holds a large number of patents.

It is a leading licensor of process technologies for the production of various types of polymers; Haldia Petrochemicals is a licensee of Basell's technology.

The true scale of the acquisition is evident from the following facts: Basell has a manufacturing presence in 20 locations in five continents with a turnover of $8.4 billion (approx. Rs 36,500 crore).

It has a total capacity of 8-million tonnes for polypropylene (Reliance, the largest producer of polypropylene in India, has a capacity of 1.1-million tonnes) and 2.5-million tonnes for polyethylene.

Basell is also a major player in speciality polymers that are sold at a premium to commodity plastics.

Why the sell-off?

So why would Shell and BASF, equal owners of Basell, sell such a leading company?

Both these companies apparently want to focus on their core businesses and exit from commodities, which are generally low-margin businesses and are susceptible to business cycles.

The point to be noted is that they are exiting from the petrochemicals business at a time when the price cycle is near all-time highs, which means that the valuation of the business will be the best possible.

Enter Haldia Petrochem

The Chatterjee Group, acting along with Access, an outfit owned by a Russian-born businessman and a few other venture capital outfits, is keen on roping Haldia Petrochemicals into the deal.

The details are not known yet but it appears that the consortium would like Haldia to pitch in with a part of the funds needed for the acquisition.

But why should Haldia agree to the proposal? Simply because it would get an opportunity to integrate its operations with one of the largest petrochemicals companies in the world.

Assuming that Haldia becomes an equity partner in Basell, it will open up opportunities not just in reaching global markets through Basell, but also in accessing technology for speciality products.

Haldia is today a pure commodity plastics manufacturer and this has its disadvantages in terms of margin realisations. There are better margins to be had in speciality polymers and compounds, which is why Reliance Industries is focussing on the area.

About 21 per cent of Reliance's polymer sales in 2004-05 came from speciality grades. Access to this technology will enable Haldia ascend to the next level in the industry.

Being part of the Basell group will also enable a free flow of managerial, technical and marketing expertise to Haldia, which will be invaluable to the company both in the domestic market and in the global markets.

What is critical, though, is how Haldia will raise the required funds. The company is still not fully out of the woods yet, though it turned profitable a year ago.

It had accumulated losses of Rs 600 crore and outstanding loans of almost Rs 4,000 crore as of March 31, 2004, the latest year for which audited figures are available.

The financial position may have improved in the last year, especially given the bull-run in the petrochemicals industry. But there is some way to go yet, especially if it wants to raise funds on the strength of its own balance sheet.

The company is restructuring its debts before the Corporate Debt Restructuring cell of its lenders.

Besides, joint owners The Chatterjee Group and the West Bengal Government, are unable to agree on a host of issues, including recapitalisation of the company. Ironically, The Chatterjee Group, not too long ago, expressed its inability to infuse further funds into the company, which prompted moves to induct Indian Oil as an equity partner.

To be sure, these factors could make it rather difficult for Haldia to raise funds in case it decides to participate in the acquisition.

Reports say that the West Bengal government is not too keen on Haldia's participation and would rather exit the company by selling its stake to The Chatterjee Group.

The sticky issue here, though, is the valuation for its shares.

The point, however, is that here is a good opportunity for Haldia to break out of its troubled past and join the global big league.

Financial restructuring and raising of funds is always possible once the promoters agree among themselves on the vital aspects. The question is: Will they?

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