5 reasons why the Holcim-Ambuja transaction stinks

Deal attacked from all sides,questions on corporate governance raised

Holcim has come back with a vengeance after minority shareholders of Ambuja and ACC objected to the company raising royalty on sales by 1% in December 2012. This time, they decided to walk away with Ambuja’s cash chest. The deal is structured in such a way that there is only one winner – Holcim. 
 

Anil Singhvi, former MD and CEO of Ambuja Cements, in an interview to CNBC has termed the Holcim-Ambuja merger nothing short of fraud. Other analysts have also been equally unforgiving. 

Ambuja-ACC deal a 'daylight robbery'

We break down the deal to see why it stinks:
 

1. The deal will result in Holcim cashing out by selling its stake in its wholly owned financial holding company Holcim India Pvt Ltd (HIPL). Ambuja is expected to buy out Holcim’s stake in its subsidiary for Rs 3500 crore and issues 58.4 crore new shares of itself. Now HIPL holds 50.1% stake of ACC. This means that Ambuja is paying Holcim to buy its stake in ACC. 
 

2. Presently, Holcim owns controlling stake in both the companies. By making one of its companies to buy the other one does not make sense unless they are being merged. Holcim is doing no such thing but just shifting its holding from its finance company to Ambuja and in the process taking away Rs 3,500 crore plus more shares of Ambuja. Through this process, it has made Ambuja a holding company of ACC.
 

3. Holding companies in the market do not get a good discounting as all they get as revenue is dividend from the companies they hold. This move has made Ambuja unattractive to shareholders as the company not only loses its cash but also gets a tag of a holding company. 
 

4. For ACC shareholders, Holcim has played a clever trick. It has transferred its 50.1% stake to Ambuja with a valuation of only around Rs 15,000 crore as compared to its market value of around Rs 23,000 crore. The math for Rs 15,000 crore is as follows. Ambuja will be issuing 58.4 crore new shares to Holcim. Ambuja was traded at Rs 192 when the deal was announced. This means Holcim will hold around Rs 11,200 crore of Ambuja Cement’s shares. Apart from this it will get Rs 3,500 crore as cash for buying 24 per cent in HIPL. Holcim has undervalued ACC through this deal. 
 

5. As a carrot to ACC shareholders, Holcim has said Ambuja will increase its stake by 10% by buying Rs 3,000 crore worth of ACC shares at a ‘later date’. In this case, Holcim has contradicted itself by valuing ACC at Rs 30,000 crore though at a later date. As for Ambuja shareholders, more money would be used to acquire shares of ACC rather than being utilized to pay dividend or utilized for expansion. 

Through this deal, Holcim has clearly got back at its minority shareholders for objecting to its plan of paying higher royalty. The company is laughing its way to the bank with a much higher amount. 
 

However, the minority shareholders and institutional investors will have their chance to fight back when the deal comes for their approval. Institutional investors prevented Satyam computers from merging Maytas.Will they do something similar with Holcim needs to be seen.