Cementing subscriptions

SMARTSHARE

The Holcim-ACC deal can be viewed in some respects as the culmination of consolidation in the cement industry.

It has disappointed the market, which saw India's oldest listed cement company as worth much more than the Rs 370 per share that the global major is prepared to pay.

Stock prices, which were close to Rs 370-level, dropped sharply to Rs 345 levels once the offer price was known. Operators were looking at a valuation in the range of Rs 410-420 but still, the dip in prices makes little sense at first glance.

From a purely technical angle, there may have been punters sitting in there with borrowed cash and these short-term players may have been forced to liquidate when it became obvious that bumper profits were unavailable.

In terms of valuations, one benchmark suggests that Holcim was generous. Grasim's payout for the 16.5 million tonne L&T cement division, which is now UltraTech Cemco, was made at around $85 per tonne of capacity while Holcim is paying around $105 per tonne for ACC's 19 million tonne capacity.

However ACC is a clearly profitable operation "" Q3 profits jumped 138 per cent to Rs 53 crore in 2004-05 despite higher expenses on most material inputs. The company is likely to see major savings on the power front in the next fiscal after the acquisition of 75 MW of new captive capacity.

ACC is a single-industry company which makes it easier to evaluate and the geographical diversification of plant locales makes it a national player. The business cycle favours a higher price since Holcim is buying into a boom.

As is normal in M&As, the entity taking charge is not wholly owned by Holcim. In fact, the Swiss major reportedly holds just about two-thirds in the entity that will take control of ACC.

Gujarat Ambuja (GACL) controls the other one-third. Holcim will also use some (about $200 million) of its buyout war chest of $800 million to gain control of Ambuja Cement India Ltd, an entity that holds stakes in Ambuja Cement Eastern, a GACL group company that controls around 14 per cent of ACC.

After the mergers and buyouts, GACL will hold around 16.5 per cent of ACC while Holcim will hold 33.5 per cent. That is assuming that the entire $600 million worth of open offers are accepted.

ACC will remain a listed company and Holcim will effectively become the second-largest player in the Indian cement industry.

That would presumably make the Swiss major very happy since the industry is going through a period of rising demand and consolidated supply, which must mean rising prices through the next couple of years. ACC would have another 1.5 million tonnes coming online by the end of the fiscal.

Will the open offers be accepted to a full extent? This depends to an extent on FI orientation.

As is normal for old Indian companies, the financial institutions are big stakeholders and LIC holds around 16 per cent with other PSU insurance majors such as New India Assurance and Oriental Insurance holding another 2-3 per cent. If they opt out, the open offers may not be completely subscribed.