Ambuja Cements - Complicated steps of a seemingly simple dance; Hold - Anand Rathi

Complex deal to simplify holding structure. Through intra-group restructuring, Holcim will transfer its 50% stake in ACC to Ambuja Cements. In return it will raise its holding in Ambuja from 50.55% to 61.39% and get Rs.35bn in cash. Both Ambuja and ACC will continue as separate entities (their own brands and company-specific strategies). The transaction will be effected through the merger of Ambuja with Holcim India Pvt. Ltd. (a Holcim subsidiary), which has a 9.7% stake in Ambuja and 50% in ACC. The transaction is subject to shareholder and regulatory approvals. Ambuja may invest up to Rs.30bn to acquire a further 10% in ACC.

Why the need. According to Holcim, the proposed transaction strengthens the platform for future growth and is expected to generate synergies (supply chains, shared services, fixed-cost optimization) of Rs.9bn p.a. This would be realized in a phased manner over two years. The proposed restructuring values ACC at Rs.234bn ($120 a ton), almost in line with the prevailing market cap and replacement cost.

Holcim, the largest beneficiary. Holcim gets Rs.35bn in cash, even as it retains majority holding in its Indian cement business while simplifying the holding structure.

Ambuja, the loser. The use of Rs.35bn cash and 28% equity dilution to buy out a group company, which will now be valued at a holdco discount, is a blow to Ambuja's minority shareholders. The impending capex (Rs.35bn) and proposed investment in ACC (Rs.30bn) would imply additional borrowings. Also, the Rs.9bn in synergies appears a tall figure given that both companies have been parented by Holcim since 2006 but still display huge disparity in costs. The positive for Ambuja is consolidation of its 58m-ton capacity with another 10m-ton being constructed. Then (in 2016), it would become the largest in India, surpassing Ultratech. Besides, the deal is estimated to be EPS neutral for Ambuja.

ACC, neutral. The ownership change (a 50% stake) from Holcim directly to Ambuja will not impact ACC much except regarding certain issues. Should it continue to pay technological fees to Holcim, given that it will now be under the Ambuja management - How will business interests be protected in the present common markets and in matters of capacity expansion?

Our take. Given Ambuja's intent to raise its stake in ACC by another 10% up to a price of Rs.1,550 (a 30% premium to the prevailing price for ACC) and the proposed deal being negative for Ambuja, we retain our preference for ACC over Ambuja. We have a Hold call on Ambuja, with a target of Rs.186, 9x its Jun'13e EV/EBITDA, and an EV/ton of US$150. In the proposed structure, a fair price for Ambuja comes to Rs.187 (Rs.145 for the parent on Jun'14e and Rs.43 for the 50% stake in ACC on a 25% holdco discount). Risks. Hike in coal prices or in technology and knowhow fees to Holcim.

Source : Equity Bulls

Keywords