Acquisition: Why JCT Is Selling Its Polyester Business...

...and why Reliance is buying it. An exclusive look at the details of the deal-to-be.

If events surrounding the acquisition of JCT Ltd's polyester division by Reliance Industries Ltd (RIL) come with a generous dash of déjà vu that's because the classic Ambani-touch is very much in evidence: yet another polyester plant; yet another company in financial distress; and yet another buy-out for a steal. Neither RIL nor JCT would comment on the subject, but some of the latter's creditors confirmed that the liability-based deal (transaction value: Rs 148 crore) was on.

Terene Fibres (India) Pvt. Ltd, a Reliance Group company, has proposed two options to a consortium of JCT's creditors. One, it will pay out Rs 160 crore as a one-time settlement of the Rs 492 crore (the rest will have to be written off) the polyester division owes the 43 banks and financial institutions who make up the consortium.

Two, the division's debt will be restructured, reducing it to around Rs 444 crore; Terene will pay the creditors a third of this (Rs 148 crore) in cash; a third as equity in itself; and a third as zero-coupon debt redeemable at the end of 13 years. The total sum involved in this three-tier transaction, explains Manish Saxena, an analyst at Mumbai-based securities firm First Global: ''Can't be more than what Polysindo was willing to offer.''

Polysindo Eka Perkasa, part of the Hong Kong-based Texmaco group, had agreed to buy the polyester division for Rs 504 crore in September, 1997, signed a sale deed for Rs 413 crore in December, 1997, and brought the price down to Rs 395 crore after a due-diligence exercise in March, 1998, before finally calling it off in the wake of the South East Asian crisis in April, 1998. The second proposal has found favour with most creditors, but Terene has informed individual constituents of the consortium that they're free to choose either.

The deal makes sense for JCT: the company's debt, at Rs 1,141 crore (on December 31, 1999), is almost identical to its turnover for the year ended September 30, 2000, and the sale of the polyester division is just one part of a larger effort to restructure the company's debt (See The Finer Facts). Sameer Thapar, JCT 's Joint Managing Director, refused to speak to BT.

Reliance does have a history of snapping up sub-scale capacities: starting from its acquisition of ICI's 30,000 tpa (tonnes per annum) PSF (Polyester Staple Fibre) facility at Thane in Maharashtra, the company has bought close to 200,000 tpa of capacity over the last seven years (See Reliance: The Acquisition Trail). Explains Sanjeev Prasad, Analyst, Kotak Securities: ''It's better to acquire a capacity than build fresh capacity. You are taking over marketshare and competition.'' For instance, when RIL acquired DCL Polyester's 40,000 tpa PFY (Polyester Filament Yarn) plant, its marketshare increased from 33 per cent to 38 per cent. RIL's real gains, however, could be in terms of enhanced reach, better supply-chain management, and feedstock-linkages.

The JCT acquisition will cut RIL's time to reach the northern markets. Says a senior executive at a Mumbai-based Polyester major: ''Why does an FMCG company create warehouses? To enable it reach its customers. (Using the same logic), JCT provides Reliance with an opportunity to service markets.'' Equally critical from the RIL-perspective is the pta (Purified Terephthalic Acid ) connection. pta is the basic input in the manufacture of polyester, and Reliance uses just 0.7 million tonnes of the 1.15 million tonnes it produces. Every acquisition, sub-scale or not, increases the captive consumption of this pta. And freight-economics (it costs Rs 2.50 to transport a kilogram of PSF over a distance of 1,000 km; for a kilogram of pta it costs Rs 0.75) make it cheaper for the company to manufacture PSF locally.

Restructuring JCT

When the Industrial Finance Corporation of India (IFCI), the lead financial institution for JCT, convened a joint meeting of JCT's lenders on February 15, 2000, to consider the hiving off of the fibre unit to Terene Fibres, Indian and foreign banks insisted on a parallel restructuring of the residual company's debt (Rs 649 crore on December 31, 1999). So, JCT submitted a proposal on February 22, 2000, wherein the Thapars would infuse Rs 80 crore (in two tranches of Rs 50 crore and Rs 30 crore), and recast the equity from Rs 120 crore to Rs 83 crore, while FIs would reciprocate by writing off some debt.

The Rs 649 crore debt includes current liabilities of Rs 89 crore; but since the company has matching current assets, this amount was not considered for restructuring. Leaving out the Rs 103 crore of unsecured debt (the Thapars are to write off Rs 84 crore of unsecured debt they extended to JCT in 1997) and the Rs 25 crore of lease rentals, the residual company would be left with a debt of Rs 432 crore. The same will be restructured to Rs 324 crore, with the lenders waiving off the remaining debt-foreign banks will waive off Rs 58 crore while Indian banks and FIs would waive off Rs 49 crore.

Of this Rs 324 crore, JCT will make a down-payment of Rs 59 crore to banks and FIs; issue Rs 59 crore worth of zero-coupon debentures to be repaid over a six-to-nine year period and Rs 20 crore worth of OPCPS (Optional Partly Convertible Preference Shares), 20 per cent of which could be converted into equity in the eighth year; and convert Rs 18 crore of loans into equity.

Thus, the residual firm would have Rs 168 crore debt, Rs 97 crore of non-interest liabilities, an annual interest burden of Rs 25 crore, and lease rentals of Rs 2 crore. Can these be serviced by the profits from textiles (operating profits of Rs 39 crore) as the steel and the nylon divisions don't make too much money? Clearly, the Thapars and FIs believe it's better to be late than declared sick.

RIL also has the option of using the smaller-capacity manufacturing facilities it acquires to produce value-added fibres like triobal that fetch Rs 4-5 more a kilogram than PSF. This is not required in the same quantity as white polyester, and by using the smaller facilities for their manufacture, RIL will save on things like change-over time at its larger plants. Thus, the acquisition of JCT's polyester division can only help Reliance consolidate its position in the petrochemical and polyester industry. At a throwaway price.