With both the buyer and the seller looking for a way out of the contract,  the sale of JCT unit may be off.

By Ranju Sarkar

It has proved to be a dud deal. Pummelled by a seller who is having second thoughts, and a buyer who is in financial trouble, the sale of the Rs 968-crore JCT's synthetic fibres division to the $1-billion pt Polysindo Eka Perkasa (Polysindo) appears to be in jeopardy.

On the one hand, the alarming depreciation of the Indonesian rupiah, following the East Asian currency crisis, has made the gambit unviable for Polysindo. On the other, JCT, buoyed by the rising domestic prices of polyester staple fibre (PSF) and the falling prices of purified terephthalic acid (PTA), is claiming that the deal was undervalued and is asking for over Rs 100 crore more.

With both the parties having doubts about the deal--and the banks playing spoilers--the sale appears to be in trouble. Confirms Samir Thapar, 32, joint managing director, JCT: "I don't think the deal would work. If they had stuck to the original price of Rs 504 crore, it would have made sense. We will formally call off the deal by the end of the month when the extended agreement expires."

Attempts to salvage the agreement have not yielded any results. On April 7, 1997, the father-son duo of M.M. Thapar, 65, chairman, JCT, and Samir left for Jakarta to discuss their problems with Polysindo's 60-year-old chairman, Marimutu Srinivasan, and its 48-year-old director, M. Arunachalam. However, both parties failed to agree on a price.

Claims Samir Thapar: "The financial institutions have insisted that Polysindo increase its consideration by Rs 100 crore." Contends Polysindo's representative, G.S. Mamik, 46, who is also the CEO of the Rs 621-crore jct Synthetics, the new company to which JCT has hived off the PSF division: "Any further consideration would make the transaction unviable."

Ever since the Thapars agreed to sell their 52,200-tonnes per annum unit (tpa), they have been unhappy with the price. While the initial MOU envisaged that Polysindo would pay Rs 504 crore for the unit, subject to a due diligence exercise, the two parties signed a sale agreement in December, 1997, at a price of Rs 413 crore. Which was further scaled down to Rs 395 crore in March, 1998.

Obviously, the Thapars--who must have received a green signal from the financial institutions before doing so--were under pressure to accept the (lower) price offered by Polysindo. For the simple reason that the PSF division was incurring losses: Rs 29.14 crore in 1996-97, which will touch Rs 80 crore in 1997-98.

However, even as the Thapars signed the agreement, the industry witnessed an upswing in its fortunes. A combination of factors--increasing polyester consumption, rising PSF prices, and falling raw material costs--has brought succour. For instance, polyester consumption grew by 38.46 per cent from 7.80 lakh tpa in 1996-97 to 10.80 lakh tpa in 1997-98. Says O.P. Lohia, 46, the CEO of the Rs 1,204.42-crore Indo Rama Synthetics: "Even if we assume 20 per cent growth in 1998-99, the effective capacity (of 13 lakh tpa) may not be able to fulfil the demand."

This demand growth has been possible due to higher cotton prices--which have gone up from Rs 40 per kg to Rs 62 per kg in the past four years--and an increasing preference for blended fabrics. This led to higher domestic prices of PSF, which rose from Rs 40 per kg in December, 1997, to Rs 47 in April, 1998.

That's not all. A fall in raw material prices--global pta contract-prices have fallen from $600 per tonne in September, 1997, to $435 per tonne today--has ensured a Rs 9-Rs10 per kg improvement in margins. Which means that even if the Polysindo deal does not materialise, JCT can generate enough cash to sustain itself.

Which is why the Thapars now argue that they were expecting a price of around Rs 500 crore--as indicated by the MOU. But when the offer price was reduced to Rs 395 crore, it became unacceptable. Avers Samir Thapar: "This was below what we thought was the right price. Our objective of hiving off the PSF division was to make our residual company (JCT) viable, and bring down its liabilities (of Rs 653 crore). At Rs 395 crore, this is not possible."

Indeed, the Thapars claim that at a price of Rs 395 crore, even the financial institutions felt that the residual company will not be in a position to service its debt. But if the Thapars feel that the division should fetch a better price, it raises a crucial question: why did they sign the sale-agreement in the first place?

Obviously, the new arguments are an afterthought triggered off by the possibility that they could get a better price due to the turnaround in the PSF industry. And the Indonesian group is also having second thoughts about the deal despite Mamik's contention that the company is "keen to complete the transaction, and funds for the same can be brought into India at short notice."

For, the deal may have become unviable for Polysindo. First, the rupiah has depreciated by 222 per cent against the rupee since September, 1997. Hence, Polysindo, which was to pay 395 billion rupiah (exchange rate: 100 rupiah = Re 1) will now have to cough up 877 billion rupiah. Second, Polysindo's acquisition strategy hinged around the ability to purchase two more PSF units--located near Indian ports--to achieve economies of scale, and reduce transportation costs.

Given the fact that Polysindo's Indonesia operations--with capacities of 3.40 lakh tpa of pta, 3.30 lakh tpa of polyethylene terephthalate (PET), 1.67 lakh tpa of PSF, and 60,000 tpa of polyester filament yarn--have been affected by the Asian crisis, the group may be unwilling to make fresh investments. In fact, BT learns that the group is even trying to reschedule loans of $200 million in the international market.

That explains why Polysindo refused to accept the demand of the financial institutions to deposit Rs 50 crore in an escrow account before being issued a No-Objection Certificate (NOC). Says Samir Thapar: "Polysindo said it will bring in the money after getting the NOC, which made the institutions a little hesitant." Differs Mamik: "Polysindo has been in discussion with the financial institutions, and a formal approval from them is awaiting the acceptance of the price by jct."

Despite these contentions, the deal is off. Explains the CEO of a Delhi-based polyester major: "The deal is not likely to materialise because, in any such deal, both the parties have to benefit. And if Polysindo has agreed to pay X why would it be willing to pay X+1?"

In fact, the Thapars are now trying to rope in the Saudi Arabian group, Al Murjan--which has a 16.70 per cent stake in the Rs 1,428-crore Ballarpur Industries, managed by Samir's cousin, Vikram--as a strategic partner. Obviously, with Polysindo extricating itself from the deal, the Thapars may have to spin another strategy to get back into the black.

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