Next logical step? Likely Ambuja-acc merger

After billionaire Gautam Adani’s acquisition of Swiss cement major Holcim’s stake in Ambuja Cements and its subsidiary ACC for $10.5 billion (around ~81,361 crore), analysts believe the next logical step might be to merge the two companies, although only in the medium term. Besides, other cost and expansion benefits may also emerge in the medium-to-long term, they say.

“Having acquired some of the jewels of the Indian cement industry, Adani may consider the merger of Ambuja Cements and ACC as it will help them rationalise a lot of fixed cost quotients at both these entities,” says Vaibhav Agarwal of Phillipcapital.

Sumangal Nevatia and Prayatn Mahajan of Kotak Institutional Equities concur, saying Adani could accelerate growth plans, invest in various cost-saving projects, and look to merge both entities in the long term.

“The earnings before interest, tax, depreciation, and amortisation per tonne of Accambuja is ~250-300 per tonne lower than Ultratech Cement. The gap may be bridged by Adani through ~125-150 per tonne synergy benefit from the eventual merger of the two companies, ~50-60 per tonne savings from existing royalty payment (1 per cent of sales) to Holcim, and investments in cost-saving projects like waste heat recovery system. In addition to the above margin expansion opportunity, Adani could reach 100 million tonnes per annum through brownfield capacity at an attractive $80-90 per tonne,” they say.

Moreover, while Ambuja and ACC have always denied brand consolidation despite talking about production-related synergies, analysts say the same can lead to cost optimisation gains through supply-chain improvements, given that only 40 per cent of gross revenue to the cement industry qualifies as production cost; the rest is a part of the supply-chain equation.

On Sunday, the Adani family, through an offshore specialpurpose vehicle, announced it had entered into definitive agreements for the acquisition of Holcim’s entire stake in Ambuja Cements and ACC. Holcim owns 63.19 per cent in Ambuja Cements and 4.48 per cent in ACC. Ambuja Cements, in turn, owns 50.05 per cent in ACC. The combined current cement capacity of Ambuja and ACC is 67.5 million tonnes (mt), with both companies having expansion plans to increase their cement capacity to 80 mt in two-three years, and 100 mt in the medium term.

The Adani family will make an open offer to buy 26 per cent in these two companies from non-promoter shareholders, according to the Securities and Exchange Board of India’s norms.

The acquisition at ~385 per share for Ambuja Cements and ~2,300 per share for ACC is at a 79 per cent premium to Friday’s closing price. Valuation assigned to ACC works out to be $132 per tonne, whereas valuation assigned to Ambuja works out to be $226 per tonne (assuming 20 per cent holding company discount for its holding in ACC).