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Essel-Propack becomes Numero Uno

Nov 15, 2000

Essel Packaging has hitherto been acknowledged as the 2nd largest producer of laminate tubes worldwide (production 1.2 bn tubes per annum). Not any more. Starting today, Essel Packaging has joined hands with Propack to create the largest laminate tubes company in the world, with a current capacity of more than 2 bn tubes annually. Essel chairman Mr. Subhash Chandra announced this at an analystís meet today. As per the terms of the merger, Propack will be issued 6.88 m preference shares amounting to 22% in Essel Propack combine. The deal will also involve a cash outflow of US$ 11 m to be paid to Propack as part consideration. The final management structure is yet being worked out. Propack brings no debt to Esselís books.

The issued shares will have an initial lock in period (Essel did not clarify the time frame). In case one party (either Essel or Propack) wants to exit the business, the other partner will have the first right of refusal.

Propack is a Swiss family owned company. The company is known for its technological edge in tube making. This has helped it substantially reduce costs and improve margins. It is this edge that Essel is looking at leveraging in the new combined entity.

The merger brings to the fore a host of synergies. While Essel is known for its laminate making abilities, Propack is tube-making innovator. Essel is No.1 laminate tubes company in India, Propack is No. 1 in China. One of the immediate synergies of the merger is the combined raw material sourcing bargaining power. The merger will help the entity get larger projects globally, in view of its economies of scale.

The merger has encouraged the Essel-Propack management to go in for an ambitious Vision 2005 mission statement. The vision sees the combined entity having around 60% of the global market share by 2005. It also envisions an 80% market share in India and China, two of the fastest growing markets in the world.

The management estimates that the combined turnover will touch Rs 15 bn by FY05, thatís a CAGR growth of 42% in five years over FY01 (estimated turnover). Similarly, the net profit of the combined entity is estimated (by the Essel management) to touch Rs 3.3 bn by FY05, a CAGR growth of 54% over FY01 estimations.

Though the current order book position of 2 bn tubes gives the management every right to be bullish on the turnover count, however, how the laminate tube markets evolve in the next five years remains to be seen. Like Propack has evolved a technological prowess to manufacture tubes, other companies might come out with superior cutting edge technologies.

But on the whole the merger looks well executed, and should benefit the company and its shareholders in the current scenario. The Essel stock trades at Rs 442 at a P/e multiple of 18 times its FY00 earnings. We could see a possible upside to the stock as a result of this news.

On the macro level, the move could spark off a spate of mergers in the laminated tube industry globally.

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