Ambuja, ACC shares slump post deal: All you need to know

Signalling a major restructuring of its India operations, global cement major Holcim on Wednesday initiated moves which would eventually result in Ambuja Cements ending up with a 50.01 percent stake in cement major ACC in phases.

Holcim has just over 50 percent in both ACC and Ambuja Cements companies currently.

Why is Holcim doing this? The Swiss cement maker says that this would getits Indian subsidiaries Ambuja Cements Ltd and ACC Ltd to work better together-saving around Rs 900 crore. But the deal will also leave Holcim richer byRs 3,500 crore as Ambujahas decided to acquire 24 percent stake in Holcim India for a consideration of that amount.

[caption id=“attachment_985093” align=“alignright” width=“380”]  A Holcim factory. Reuters[/caption]

Following the news of the deal, stocks of both Ambuja and ACC slumped. At 10.30 am, Abmuja Cements is down 13 percent while ACC shares are down 4.10 percent.

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Here’s what you should know about the deal:

Highlights of the Scheme

Ambuja will issue 58.4 crores equity shares of Ambuja to Holcim

Holcim India’s 9.76% shareholding in Ambuja will stand cancelled

Post completion, Ambuja will own a 50.01% stake in ACC, and Holcim will own a 61.39% stake in Ambuja

How the deal will proceed:

Ambuja will first acquire a 24% stake in Holcim India for a cash consideration of Rs 3,500 crores

Holcim India will then be merged into Ambuja through an all stock merger under a High Court Scheme of Amalgamation

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Both transactions will close upon receipt of all relevant approvals

The proposed scheme of Amalgamation will be subject to the following approvals:

Shareholders and creditors of Ambuja and Holcim India

BSE Ltd and National Stock Exchange of India Limited

Securities and Exchange Board of India (SEBI)

Foreign Investment Promotion Board (FIPB), India

Jurisdictional High Courts at Delhi and Gujarat

Regulatory and other approvals as may be required.

Reactions to the deal:

Analyst reaction:

Analysts have slammed the convoluted way the Swiss-based Holcim Group has chosen to consolidate its holdings in cement major ACC through Ambuja Cements Ltd.

While the general consensus appeared to be that the minority shareholders in Ambuja Cements have been short-changed because of over-valuation of ACC, the sharpest criticism of the reorganisation formula came from Anil Singhvi, former MD & CEO of Ambuja Cements, who is now the Chairman of Ican Investment Advisors.

In media interactions, he dubbed the deal as “definitely not good for minority shareholders’’ of Ambuja Cements.

He said that the Ambuja Cements was shelling out about Rs 15,000 crore for a 50 percent stake in ACC which was valued at Rs 23,000 crore. At 50 percent, this should be worth Rs 11,500 crore. But ACL would be shelling out Rs 3,500 crore more and he found it strange at this hefty payout when both were under Holcim management, reported Business Line.

Singhvi also added that Ambuja will dilute its shareholding by almost 30 percent and this will not be earnings per share (EPS) accretive. “In my opinion, this is nothing short of a fraud played out on the minority shareholders in India,” he says in an interview to CNBC-TV18.

Industry experts reaction:

The move was welcomed by the industry experts. However, they desired more clarity on the brand usage and synergies of operations between the two companies going forward.

“There are lots of synergies between the two companies and it will help their marketing much better to have these two forces combined,” Sanjay Ladiwala President, Cement Stockists and Dealers Association of Mumbai said.

According to V Srinivasan, Cement Analyst at Angel Broking Ambuja, which will now hold majority stake in ACC may become the holding company of latter. Ladiwala said that most likely Ambuja brand, which commands more premium could be declared as their flagship brand and ACC brand would be merged in to it. “Ambuja brand commands a substantial premium in most regions over ACC that ranges from about Rs 80-100 a tonne that multiplied by the total capacity which is close to about 50 million tonnes of the combined entity would be a sizeable premium,” he added.

Brokerage firms:

At least three brokerages downgraded their ratings on Ambuja Cements Ltd.

Bank of America Merrill Lynch cut the company to “neutral” from “buy”, while Religare has cut it to “sell” from “hold” and recommended investors to switch to other large-cap cement companies such as UltraTech Cements Ltd.

“We think upside potential from Ambuja’s CY14-EPS recovery may be dulled by potential concerns over treatment of minority shareholders vis-a-vis its controlling shareholder - Holcim,” said BofA Merrill in a report. BofA points out that restructuring announced on Wednesday will likely leave Ambuja’s minority shareholders with flat-to-tad lower post-deal earnings, while Holcim gets Rs 3,500 crore rupees in cash and lifts stake in Ambuja to 61.4 percent.

Religare says the acquisition will put Ambuja’s minority shareholders at risk as they would now be stakeholders in a “less-efficient” company that is ACC Ltd.

According to JP Morgan, following the transaction, there will be questions about whether the growth opportunities for ACC would be restricted with parent (Ambuja) vying for growth in similar markets. In their view, with most cash now on ACC’s balance sheet, utilization of cash for Ambuja’s growth is a key risk arising out of the deal.

Credit Suisse says while Holcim is the clear winner andACC minority shareholders will benefit at the margin, thereorganisation is negative for Ambuja’s minority shareholders.