Indian Firms Spread Their Wings

Kiri Dyes & Chemicals, Dorf Ketal, and Aditya Birla are not household names in the U.S. or European chemical industries, but the executives running these firms are intent on changing that. They are among the growing number of Indian corporations moving outside their country’s borders by acquiring Western chemical businesses.

In their attempt to become global players, Indian chemical companies have been on a mergers and acquisitions (M&A) spree, with both deal volumes and values this year that are anticipated to top prerecession figures from 2008. “Indian companies have upped the ante,” says Preeti Patel, a consultant at international advisory firm PricewaterhouseCoopers. “M&A activity in India, essentially in the health care and biotech, information technology, and chemical sectors, has increased fivefold over the past 12 months through May, with 70% of those deals outside India.’’

Companies in India have been scouting beyond their traditional target geographies, leading to an increase in cross-border deals and transcountry joint ventures. Specific figures on cross-border chemical deals aren’t available, but in the 2011 fiscal year, which ended in March, the chemical sector overall witnessed 42 deals valued at a total of $1.2 billion, according to the consulting firm Ernst & Young.

Indian fine chemicals companies started the westward trend in the middle of the previous decade. Nicholas Piramal acquired Avecia’s custom synthesis business in 2005, Dishman Pharmaceuticals & Chemicals purchased the Swiss firms Carbogen and Amcis from Solutia in 2006, and Shasun Chemicals & Drugs bought Rhodia’s pharmaceutical custom synthesis business in 2006.

More recently, though, the action has shifted to industrial chemical companies. In March of this year, India’s largest agrochemical firm, United Phosphorus (UP), purchased the 50% stake held by Isagro in Sipcam Isagro Brazil for an undisclosed amount. Sipcam Isagro Brazil is a 50-50 joint venture between Sipcam-Oxon and Isagro, both Italian agrochemical firms

“The deal size is pegged around $600 million,’’ says an official close to the deal who requested anonymity. For UP, the acquisition was its third in the 2011 fiscal year. Earlier, the firm had acquired DuPont’s mancozeb fungicide business and the U.S. rice herbicide company RiceCo.

“Given the market’s high entry barriers and UP’s limited local presence, we thought Sipcam represented a unique opportunity to kick-start operations on a larger scale,” says Jai Shroff, UP’s chief executive officer. “We want to emerge as a creditable player in the international business.’’

For UP, the three recent acquisitions follow its 2006 purchase of Arkema’s Cerexagri crop protection unit for about $140 million. At the time, the deal was one of India’s biggest cross-border chemical deals.

Sudhakar Shenoy, an official of Yes Bank, which was United Phosphorus’ investment banker on the Sipcam purchase, says his client will use internal funds to purchase Isagro’s stake. He points out that several Indian firms are cash rich and keen to add to their string of cross-border acquisitions. “Indian companies are sitting on a war chest. They have access to capital, adequate finance and cash resources at their disposal, and access to bank bonds or equity capital markets enabling major buyouts,’’ Shenoy says.

Another flush company is Tata Chemicals, which bought British Salt in January. The $150 million deal to acquire the British salt producer was done through Brunner Mond, Tata Chemicals’ U.K.-based inorganic chemicals subsidiary, and it was funded largely with internal cash. Tata Chemicals, part of the giant Tata conglomerate, acquired Brunner Mond in 2006.

Similarly, in June, Aditya Birla, a large Indian conglomerate, paid $875 million in cash for the world’s third-largest manufacturer of carbon black, Atlanta-based Columbian Chemicals. Santrupt Misra, a member of the newly formed board of Columbian Chemicals, says the deal “doubles capacity, from 1 million tons to 2 million tons.’’

Carbon black is used by tire and other rubber manufacturers. Thanks to the acquisition, Misra says, Aditya Birla can now supply 20% of the global tire industry’s demand for carbon black. Commenting on India’s acquisition frenzy, he adds that Indian firms are looking at the Americas and Europe to ensure expansion in manufacturing and sales.

It is not just big firms that are intent on increasing their geographical footprint. Midsized Indian chemical companies have been hunting for international acquisitions that provide access to cheaper feedstocks and new high-growth markets. Eager to make a foray into international waters, many are narrowing their sights on Western chemical businesses that could be faltering.

Late last year, for example, the Indian dyes manufacturer Kiri Dyes & Chemicals paid about $70 million to acquire Germany-based DyStar Group, which had been in bankruptcy since 2009. The acquisition moved Kiri into a new league, giving it access to DyStar’s 16 manufacturing plants, its brand, patents, technical know-how, and 21% global market share.

Also last year, the Mumbai-headquartered specialty chemical company Dorf Ketal acquired Johnson Matthey’s specialty catalysts business. Terms of the agreement ensured that Dorf Ketal got the business, trademarks, intellectual property, and product know-how. Subodh Menon, founder and director of Dorf Ketal, commented that the acquisition was another in a series of deals that would help the firm build on its expertise in organic-based specialty chemical applications. In December 2009, Dorf Ketal acquired DuPont’s business in titanate and zirconate catalysts.

And in May of this year, Navin Fluorine International Ltd. (NFIL), part of India’s Arvind Mafatlal Group, acquired a 51% stake in U.K.-based Manchester Organics for about $7 million. Arvind Mafatlal Group Vice Chairman Hrishikesh Mafatlal called the acquisition of majority control of Manchester “an important step for NFIL in its aspirations to become one of the major global companies in specialized fluorination chemistries.”

Analysts explain that the string of U.S. and European acquisitions is made possible by spiraling Indian industrial sector earnings on the back of a booming economy and a stock market rally. Indian companies are also eager to acquire firms of a global scale to get proximity to the markets they have been targeting.

Chandrajit Banerjee of the Confederation of Indian Industry, a trade association, says companies are ready to spend even more to acquire businesses if they find a strategic fit. “There is an appetite to become a global player by adding capacity and getting new technology and proximity,” Banerjee says. “Easy access to financing, as well as ample liquidity, has facilitated an increase in deal size.”

However, there are signs that the frenzy may be slowing. “Last fiscal year, it was possible for Indian firms to get a foothold in regions, particularly in Europe and the U.S., by buying assets because the valuations were pretty cheap,” says Jai Prasad of the investment banking firm Asit C. Mehta Investment Intermediates. “But then these economies started doing well and assets became expensive.’’

In response, Indian companies are looking beyond the West to new frontiers such as Vietnam. Kishore M. Shah, president of the Indian Specialty Chemical Manufacturers’ Association, says Vietnam’s imports of chemical products from India last year increased by 27% to $75 million. “Developing countries will witness strong M&A activity, given the strong recovery of demand in these markets,’’ he notes.

Some firms are looking even closer to home. In April, for example, Aditya Birla acquired the chloro-chemicals unit of Indian manufacturer Kanoria Chemicals & Industries for $180 million. And after toying with the acquisition of LyondellBasell Industries in 2009, Indian refining giant Reliance Industries now seems to be concentrating on expanding its own chemical facilities in India.

“Even as Indian companies scout for overseas acquisitions, many are seeking buyouts in their own backyard,’’ says C. G. Srividya, a partner at the consulting firm Grant Thornton India.

Clearly, the Indian chemical sectorhas been chomping at the bit, with companies emulating Western multinationals but also forging their own path. Although some companies prefer to focus ondomestic business, a majority of them demonstrate no such modesty, keen to spread their wings and enter the biggame.