Shareholders of Ambuja Cement Eastern can reject the open offer made by the Holcim and Ambuja Cement India, which is now owned by Holcim and Gujarat Ambuja Cement. Brokers recommendation is predicated on a merger of Ambuja Cement Eastern and ACC. If this happens, we believe the swap ratio would not be adverse to the shareholders of Ambuja Cement Eastern. The acquirers have undertaken to sell a part of their holdings to ensure that the non-promoter holding remains at the pre-offer level and the stock listed. Given its strengthening fundamentals, brokers expect the stock to then trade at levels close to the open offer price of Rs 70 (the market price also hovers around this level); this would be a cushion for shareholders if the merger does not materialise.
The rapid improvement in the fundamentals of Ambuja Cement Eastern, the likely boost from active support by Holcim, which could lead to higher operating efficiencies, and the location of its units in the eastern markets where prices are likely to remain firm at higher levels, also underpin broker recommendations. A merger would enhance the geographic footprint and the profitability and earnings quality of ACC. The principal risk to our recommendation is an adverse swap ratio (any ratio that involves less than three shares of ACC for every 20 in Ambuja Cement Eastern) to the merger. We believe that the probability of such a swap ratio is low and it may be worth the risk to remain invested in the Ambuja Cement Eastern stock.
Rationale for the merger: In the open offer for ACC by Holcim, the acceptance level was less than expected. Ambuja Cement India now holds 35.6 per cent of ACC. Had the offer been accepted in entirety, its stake would have risen to a tad in excess of 50 per cent. Holcim and Gujarat Ambuja Cements targeted this shareholding level. Having failed to attain this mark, brokers expect the combine to push, over the next six months to a year, for a merger of Ambuja Cement Eastern with ACC for the following reasons:
Holcim would want to put through a merger, as that would ensure that its stake in ACC would rise by a few percentage points. This would reduce the number of shares that Holcim would have to buy from the market via the creeping acquisition limit of five per cent every year, fast-track the process of gaining a stake in excess of 50 per cent in ACC and enable it pursue growth plans in India. Gujarat Ambuja, too, would be favourably inclined towards this merger, as that would enhance the value of its shareholding in Ambuja Cement India. It had already pocketed a neat profit of Rs 285 crore when it transferred Ambuja Cement Eastern to Ambuja Cement India in 2000; in the deal with Holcim early this year, Gujarat Ambuja had further capitalised on this asset by negotiating an open offer price of Rs 70 per share.
A merger would also ensure a greater degree of institutional investor interest in the ACC stock, as it would have a capacity of close to 25Mt. The fundamentals of Ambuja Cement Eastern have improved rapidly under the auspices of Gujarat Ambuja Cements. This trend is likely to continue with support from Holcim. But with a capacity of just 2Mt, it cannot remain a standalone unit from a long-term perspective. It still has sizeable debt, and its equity base is also too large to raise finances for any new capacities or acquisitions. Holcim would also prefer to route them through ACC once it acquires a stake in excess of 50 per cent. A merger would also ensure that the legal requirement to keep Ambuja Cement Eastern listed — condition that was imposed when Gujarat Ambuja acquired the company — is effectively satisfied.
