A merger of Ambuja Cements with ACC was expected ever since multinational cement major Holcim acquired control of both these Indian cement companies many years ago. But the deal proposed on Wednesday is positive neither for Ambuja Cements nor ACC. Instead, it is the parent Holcim, which receives Rs 3,500 crore in immediate cash, which seems to be clear winner from this deal.
According to the terms of the deal, Ambuja Cements is to buy shares in Holcim India, a subsidiary of Holcim, to give it an indirect stake of 50.01 per cent in group company ACC.
Nil premium
After securing shareholders’ approval, the company will pay Rs 3,500 crore in cash to the parent Holcim and also allot it Rs 10,000 crore in the form of shares (at the current market price of the stock).
Back-of-the-envelope calculations show that the value of Holcim India is around Rs 13,600 crore. So, Ambuja Cements has not paid a premium for its stake in Holcim India.
Then, why is the deal shareholder-unfriendly? Though Ambuja is shelling out cash as well as issuing new shares, it isn’t receiving good value in return. One, on the issue of new shares to Holcim India, the company’s capital base expands by 28 per cent. If Ambuja’s earnings remain the same as last year, this would result in earnings per share (EPS) dilution of around 22 per cent. If Ambuja does manage to reap synergies from this merger, the dilution could be of a lower order.
Ambuja Cements is being compensated for this through its indirect holdings in ACC. As Holcim India merges with it, its 50.01 per cent stake in ACC will be transferred to Ambuja Cements. That should reflect in Ambuja’s stock price. But here the problem is that markets usually assign a discounted value to any indirect stake held by a company. Assuming ACC stake is valued at a 20 per cent discount, the holding will be worth Rs 45 (a share).
This brings the fair price of the Ambuja Cements stock down to about Rs 163. But its actual market price before this deal was Rs 191. That explains why the Ambuja Cements stock declined by 11 per cent on Thursday.
Questionable claim
There is also the fact that with all its cash used up to pay its parent, Ambuja Cements will not be left with surpluses to fund any expansion plans this year. Expansion, however, may happen through ACC. Over the next few years the group plans to increase capacities by over 10 million tonnes a year.
Ambuja Cements’ management has said that the new structure will help the two companies save around Rs 900 crore over the next two years. The companies have been under Holcim’s management for many years now and, in our view, synergies, if any, would already have accrued.
For ACC shareholders, the picture remains pretty much the same, except that earlier Holcim India was its holding company and now it is Ambuja Cements. The deal could have been a value proposition for ACC shareholders had Ambuja Cements directly merged ACC with it and made an open offer to its shareholders.
The further acquisition of 10 per cent stake in ACC by Ambuja Cements is also planned only through the creeping acquisition route.