Analysts say the 4:7 swap ratio between UltraTech Cement Ltd and Samruddhi Cement Ltd (into which Grasim Industries Ltd hived off its cement business) is slightly skewed in favour of Grasim. But shares of both Grasim and UltraTech closed at least 1.5% higher at Rs2,336 and Rs740, respectively, on Monday.
UltraTech will issue around 150 million shares to Samruddhi for the cement business. Following the issue of shares, UltraTech’s equity would go up from 124 million to 274 million shares. Grasim’s stake will be 60.3% of the combined entity. Even shareholders of Grasim will hold a direct stake in the cement business, as they will have around 19% in the merged entity. The balance 21% will be held by UltraTech’s minority shareholders.
Graphics: Ahmed Raza Khan / Mint
A section of institutional analysts view the move to be slightly skewed in favour of Grasim as its economic interest in the combined entity goes up marginally from around 79% to 80%. But the management has pointed out that Grasim has until now invested heavily in the cement business. It also has a white cement business, which is more profitable than grey, although small.
After the merger, UltraTech will become the 10th largest global cement player and the country’s largest, with a capacity of nearly 50 million tonnes per annum of cement from 22 plants. Besides, its power generation capacity and ready mix concrete units, too, will be enhanced substantially (see Table). Market share with a pan-India presence will go up to 20%.
Based on the deal, the enterprise value of Samruddhi is around $106/tonne (Rs4,887), while that of UltraTech is $93-95/tonne. Compare this with the valuation of Ambuja Cements Ltd at $112/tonne.The deal has been approved by both parties at a 20% premium to the replacement cost of Samruddhi’s assets.
More importantly, the pre-merger earnings per share of UltraTech at around Rs57 could be higher by 20% during fiscal 2011. The road to the merger, effective 1 July, will see a brief listing of Samruddhi shares. Given the present market conditions, the share could list at around Rs400, providing an exit option too for its shareholders.
What remains to be seen, though, is how the Grasim stock would react following the exit of Samruddhi. This may be the single largest factor that made Grasim retain directly its strategic and controlling 60.3% stake in the combined entity.
For UltraTech, its size and pan-India presence will see a re-rating in valuation. The stock would, in its new avatar, score over the Ambuja-ACC combine, which in turn would better Grasim’s valuations.
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