In a complex deal, Holcim will raise its stake in its Indian unit Ambuja Cements to 61.39% from the current level of just over 50%, and Ambuja will, in turn, acquire Holcim’s stake of 50.01% in ACC held through its Indian subsidiary Holcim (India) Pvt. Ltd. Photo: Bloomberg (Bloomberg)
In a complex deal, Holcim will raise its stake in its Indian unit Ambuja Cements to 61.39% from the current level of just over 50%, and Ambuja will, in turn, acquire Holcim’s stake of 50.01% in ACC held through its Indian subsidiary Holcim (India) Pvt. Ltd. Photo: Bloomberg

Holcim revamp plan to result in `6,500 crore outgo from Ambuja

Ambuja shares plunge 14.6%, the biggest drop in more than 20 years

Mumbai: Holcim Ltd’s restructuring of its Indian units will result in a total cash outflow of about 6,500 crore from Ambuja Cements Ltd to the Swiss cement maker, say analysts. Ambuja shares plunged as much as 14.6% on Thursday, the biggest drop in more than 20 years, as investors judged the transactions to be unfavourable to minority shareholders of the Indian cement maker.

Ambuja on Wednesday announced a complex deal that will save Holcim around 900 crore as well as earn it 3,500 crore in the near term—for a 24% stake in Holcim (India) Pvt. Ltd that its Ambuja Cements unit will acquire. But analysts say the cash outflow from Ambuja Cements to Holcim will be nearly double that, at the expense of minority shareholders of Ambuja Cements.

“The synergies planned under the current restructuring by Holcim will result in cash going out from Ambuja Cements to the tune of 6,500 crore," said Jinal Joshi, an analyst at domestic brokerage BOB Capital Markets Ltd.

“For Holcim, the deal is likely to garner cash of 3,500 crore, which will help it to de-leverage its book. For ACC Ltd, it will benefit in long-term as Holcim via Ambuja Cements is planning to further hike its stake by 10% at maximum of 3,000 crore," Joshi said. “This would provide support to ACC’s stock price."

For minority stakeholders of Ambuja Cements, though, the deal is negative because of the cash outflow, he said.

Holcim will raise its stake in Ambuja Cements to 61.39% from just over 50% now, and Ambuja will, in turn, acquire Holcim’s stake of 50.01% in ACC held through its Indian subsidiary Holcim (India).

“Effectively, Holcim is taking an indirect dividend without losing control of both the entities," said Shriram Subramanian, founder of India’s first proxy advisory and corporate governance research firm InGovern Research Services. “This transaction has been structured clearly for the gain of promoters (Holcim) at the expense of minority shareholders of Ambuja."

Subramanian added that if the transaction was structured for operational synergies, as Holcim’s management claims, it should have opted for a merger of Ambuja and ACC at appropriate valuations.

Under the restructuring, Ambuja Cements will first acquire a 24% stake in Holcim India for 3,500 crore, followed by a merger of Holcim India with Ambuja.

The restructuring was touted as part of Holcim’s decision to effectively merge (without really doing so) its Indian subsidiaries ACC and Ambuja Cements to optimize capacity utilization without much additional investment. ACC and Ambuja together contribute nearly 20% of Holcim’s consolidated earnings before interest, tax, depreciation and amortization.

Ambuja will acquire the stake in Holcim India from Holderind Investments Ltd, Mauritius, a subsidiary of Holcim.

The merger swap ratio is one Ambuja share for 7.4 Holcim India shares, translating into an implied swap ratio of 6.6 Ambuja shares for every ACC share, the company said in a statement.

Holcim will also continue to own a 0.29% stake in ACC (again through Holderind Investments). Ambuja Cements and ACC will continue as separate listed entities with separate managements, marketing teams and retail brands.

“Based on the approved merger swap ratio, Ambuja will issue 584 million new equity shares of Ambuja to Holcim, as consideration for the merger," Ambuja said on Wednesday. “Post the merger, the expanded capital base of Ambuja (post cancellation of the shares held by Holcim India in Ambuja and the issuance of new shares as aforesaid) will increase by 28% and comprise 19,775 million shares. Holcim will then own 61.39% of Ambuja and Ambuja will in turn own 50.01% of ACC."

Karvy Stock Broking Ltd, too, said the deal will lead to greater cash outflow from Ambuja.

“For this new deal, Ambuja Cements would pay 35 billion ( 3,500 crore) to Holcim as well as issue 584 million equity shares to Holcim. This leads to a deal value of 11.5 billion for the 50% stake in ACC. The swap ratio works out at 6.6 shares of Ambuja Cements for every share of ACC. While the company talked of synergy benefits of 8-9 billion through logistics and fixed out rationalization in phased manners in two years, the deal would lead to 35 billion cash outflow from the books of Ambuja to the parent company," Karvy Stock broking said in a report on Thursday.

It retained a “sell" recommendation on Ambuja Cements stock as while the synergy would take time to play out, there will be immediate cash outflow.

“The announced deal does not envisage merger of ACC and Ambuja Cements. However, Ambuja management has indicated that the combined entity would be able to exploit and unlock potential supply chain and fixed cost rationalization synergy benefits of 9 billion ( 900 crore), which is 20% of calendar year 2012 Ebitda (earnings before interest, tax, depreciation and amortization) of the combined entity over the next two years," Motwani said. “However, we have our reservations on this, since physically there is no merger of ACC and Ambuja and they will continue to operate as separate entities."

Prima facie, he wrote, the restructuring will be detrimental to minority shareholders of Ambuja Cements as the company will be parting away with its huge cash balance of 3,500 crore, which is more than 90% of it calendar year 2012 cash on books, without any addition to its earnings per share.

“Ambuja shareholder should vote against such a proposal," Subramanian of InGovern Research said. “ACC minority shareholders might not be currently affected due to this transaction, but at a later stage if Holcim tries to merge ACC and Ambuja, this may be done at the expense of ACC shareholders by undervaluing ACC."

Ambuja Cements shares closed 10.52% down, while those of ACC fell 3% on BSE on Thursday. The exchange’s benchmark Sensex shed 1.42% to close at 19,804.76 points.

“The market has not reacted positively because it does not give the same valuation to a holding company as compared to operating company, which is why the slide in Ambuja shares this morning," Deven Choksey, managing director and chief executive officer of K.R. Choksey Shares and Securities Pvt. Ltd, said in a phone interview. “However, over a longer period, the deal is beneficial to both the companies. The saving of 900 crore is a big positive."