Tata Chemicals to acquire 25.1% stake in Olam worth US$290mn

Risk on project execution is significantly reduced as the two companies brings critical expertise in project management, production, operations and maintenance, and sales and marketing of fertilisers.

Olam International Limited (“Olam”), a leading global, integrated supply chain manager and processor of agricultural products and food ingredients, announced on Monday that Tata Chemicals Limited (“TCL”), a part of the Tata Group of Companies, and a global company with business interests that focus on living, industry and farm essentials, will invest US$290 million to acquire 25.1% equity stake in the Urea Manufacturing Project (“Project”) in Gabon from Olam and the Republic of Gabon (“RoG”).

As announced in November 2010, the port-based ammonia-urea fertiliser complex in Gabon is being set up through a joint venture between Olam (80%) and RoG (20%) at an estimated project cost of US$1.3 billion. 65% (US$845 million) of the estimated capital cost is to be funded by non-recourse debt financing and the balance 35% (US$455 million) through equity investment by shareholders.

The investment by TCL represents an Enterprise Valuation (“EV”) of US$2 billion for the Project or a 54% premium over its book value. Assuming US$845 million of debt, this translates to an equity valuation of US$1.155 billion or 154% premium over book value of equity.

With TCL’s 25.1% stake in this Project, Olam’s and RoG’s shareholding in the Project will reduce from 80.0% to 62.9% and 20.0% to 12.0% respectively. Correspondingly, Olam’s share of the total equity investment in the Project will reduce from US$364 million to US$146 million. RoG’s share of the equity investment will also reduce from US$91 million to US$19 million.

Execution work on Stream 1 of 1.3 million TPA of Urea has already commenced and it is expected to be commissioned in three years time. The operational capacity would be 1.3 million MT Urea p.a. (2,200 MT Ammonia and 3,850 MT Urea per day).

This Ammonia / Urea Venture in Gabon will ultimately result in setting up of two streams, each of 1.3 million TPA of Urea with matching ammonia capacity for which feedstock agreement at competitive prices has already been entered into with the RoG. Time schedule for executing Stream 2 would be mutually decided by Olam, RoG and TCL over the next 24 months. TCL is expected to hold significantly higher stake in stream 2. Combined, the Project is envisaged to have a capacity of 2.6 million MT p.a.

TCL was promoted by Tata Sons in 1939; Tata group has a consolidated market capitalisation of US$99 billion and is one of India’s and Asia’s leading business groups. TCL is a market leader in the Urea and Phosphatic fertilizer segment and operates one of the world’s most energy efficient Urea facilities of 1.25 million tons per annum capacity at Babrala in Uttar Pradesh, India. TCL is also a leading manufacturer of Di-ammonium phosphate (DAP) and NPK fertiliser at its Haldia plant in West Bengal, India. In addition, TCL has a Phosphoric Acid manufacturing joint venture in Morocco.

As a strategic partner to the Project, TCL will be primarily responsible for project management during the erection and commissioning of the plant as well as operation and maintenance (“O&M Contract”) of the plant for the first three years post commercial production. The O&M Contract may be renewed for a mutually agreed period. Sales and marketing of ammonia and urea products will be jointly undertaken by Olam, RoG and TCL through a joint venture agreement in which Olam and TCL would hold equal stake. In addition, TCL has committed to off-take 25% of the urea output into Indian markets, subject to the de-regulation of urea imports into India.

Olam’s Group Managing Director & CEO, Sunny Verghese said: “We believe, together with Olam’s team, Tata Chemicals’ participation in the Project as a strategic partner with substantial expertise in Urea Manufacturing, project management and execution will ensure successful implementation of the Project on time and on budget and substantially derisk our execution of this Project. The investment by an established fertiliser player such as Tata Chemicals clearly validates and confirms that this Project is an attractive excess return opportunity.”

Mr. R. Mukundan, Managing Director of Tata Chemicals Limited said, “TCL is delighted to partner with Olam and the Republic of Gabon to deliver value to all stakeholders. TCL has a significant presence in Kenya, South Africa and Morocco and this Project is also in line with our focus to partner in the growth and development of Africa.”

He further added, “This investment brings us the strategic advantage of sufficient Gas tied up at competitive fixed price for both the streams. The feedstock is assured in terms of quality and quantity under a 25 year competitive fixed-price natural gas contract with Republic of Gabon. This plant is envisaged to be one of the lowest cost urea manufacturing facilities globally. Strategically located near Gabon’s main seaport, it also enables efficient and cost effective material handling and proximity to target markets i.e. Africa, North America, Latin America and India. Up to 25% of the production would be reserved for sales in India through the existing TCL network, subject to de-canalisation in India. This is a value accretive project with expected yearly EBITDA of US$300 million to US$350 million per stream. We believe this Project will fill the gap of growing Agri-inputs need in Africa, Latin America and Asia.”

Project Execution Risks Mitigated
Olam has already done considerable work for firming up the critical project inputs including the feedstock gas, land and water. Environmental studies are being carried out to meet international standards in this regard. Evaluation of technology and selection of EPC contractor is in progress. With the induction of the experienced TCL team, the engineering, procurement, construction and commissioning risks will be significantly mitigated to ensure effective implementation of the Project on schedule and on budget.

Operation and maintenance risks will also be substantially reduced as TCL’s O&M team will help achieve smooth commissioning of the plant and establishment of the optimal safe operating parameters in terms of efficiency and capacity utilisation. Training of Gabonese personnel will enhance local employment opportunities. The TCL team will help establish standard operating procedures to help extract production efficiencies consistent with plant safety and environmental sustainability.

TCL’s knowledge of fertiliser products and its extensive contacts with international fertiliser marketing entities, coupled with the global reach and logistics expertise of Olam will help reduce marketing and off-take risks.