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The Complex Holcim Deal

Monday, July 29, 2013
By Clifton Desilva

Clifton Desilva is an investment expert and a Director at Altina Securities.

The cement industry is part of the infrastructure segment but unlike many infrastructure segments which have generated huge losses to investors the cement segment has been resilient. Also the industry is dominated by respected names like the Holcim group, the Heidelberg group, the Aditya Birla group, the Shree Cements group etc. On a comparative basis the cement sector transparency levels appear better than some of the sectors in the infrastructure sector.

Holcim the Swiss based cement maker was considered as a transparent and investor friendly group. However its latest decision on restructuring of operations appears to have not gone well with the minority shareholders

Shares of Holcim group owned subsidiaries and cement majors ACC and Ambuja cement fell by 3% and 10.5% respectively on Thursday. The Swiss majors attempt to consolidate Indian operations through a complex Holcim Ambuja – ACC restructuring deal triggered the fall as markets perceived it to be detrimental to minority shareholders. Accelerating the fall was the lack luster performance of ACC and Ambuja in the June quarter.

Ambuja Cement has a cash and bank balance of Rs 3700 crores. As a part of the restructuring programme Ambuja Cement will acquire a 24% stake in Holcim India for an amount of Rs 3500 crore. Subsequently a merger would take place between Ambuja Cement and Holcim through a share swap arrangement. After the merger the combined entity will control 50.50% of the holding of ACC and the stake of Holcim in Ambuja Cements will move up to 61.39%.

A report by Credit Suisse states that Holcim debt EBIDTA rose from 1.5% in 2006 to 2.7% in 2011. The company has been attempting for a while to de leverage its balance sheet and maintains investment grade status and therefore the latest financial restructuring appears to be a step towards that.

Holcim’s Indian subsidiaries are performing relatively better compared to its operations in Europe and the US. The contribution of its Asian subsidiaries to its total EBIDTA increased from 27% to 44% in the last four years while EBIDTA contribution from Europe declined from 36% to 15%.

The argument is that Ambuja is paying Rs 3500 crore more for its acquisition for a 50% stake in ACC. The valuation of ACC is around Rs 23,000 crore and a 50% stake should be valued at Rs 11,500 crore but what is being paid by Ambuja is Rs 15,000 crore , an excess of Rs 3,500 crore.

From the shareholders point of view there is nothing much to gain from the deal as the benefits would accrue to Holcim. But if the entities were merged then it would not receive the cash of Rs 3500 crores.

The minority shareholders claim to have got a raw deal and are of the view that the parent Holcim is the prime beneficiary as it is using funds from the cash rich Ambuja to take care of its interests.

However, contrary to the minorities view the management of Holcim is of the view that the deal is deal is beneficial to the minority shareholders as Ambuja is acquiring ACC at current market price and is using the available cash on the balance sheet to much better use by acquiring at market price a fantastic asset.
It is claimed that the price of $115 per tonne is very attractive acquisition with a controlling stake in ACC which is an icon brand name.

According to the management a full merger would have costs along with benefits and at this stage the management would like to avoid the costs.

What is specific is that ACC is probably the strongest cement brand in India; it has a very good and dedicated marketing team. It has an excellent distribution and retail network and the management would want that to remain intact.

After this specific structure  the management  would go  after the  main synergy blocks which are in the logistics area, the supply chain, operational efficiencies, sharing more production capacity, so far it is in the backend where the management is looking for synergies and not overall.

The view is that Ambuja shareholders are acquiring a fantastic asset, a majority will get consolidated into its balance sheet and it is acquiring it at $110 -115 per tonne at an EBITDA (earnings before interest, taxes depreciation and amortization) multiple of eight. The implied return on the asset is that it will actually generate is a much higher return than it will generate on the cash available.

The deal has long synergies for the merged entity. According to the management, it has the potential of providing value of Rs 900 crore to the combined entity.

However, there are reports that SEBI is examining the terms of the agreement between Ambuja Cements and Holcim to ensure that the interests of minority shareholders are protected.

The stock prices of the companies may not be impacted much though in the short run they were subjected to a knee jerk reaction. Both companies provide investment opportunities for long term investors at current beaten down prices and on further declines.

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