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Last week, when Onne van der Weijde, the managing director of Ambuja Cements, announced the complex ownership restructuring of Ambuja-ACC, it paved the way for a straight outgo of Rs 3,500 crore from Ambuja's strong balance sheet to its parent company, Switzerland-based Holcim. This is the first such arrangement ever since Holcim ventured into India eight years ago.
According to the arrangement, in a two-step process, Ambuja Cements will acquire 24 per cent in Holcim India - a wholly-owned financial holding company of Holcim - followed by a stock merger between the two. At present, Holcim India directly holds 9.76 per cent stake in Ambuja and 50.01 per cent in ACC.
After the merger, Holcim India's stake in Ambuja will stand cancelled and Ambuja will own 50.01 per cent stake in ACC. With this, Holcim's stake in Ambuja Cements will rise from 50.55 per cent to 61.39 per cent. Ambuja, in turn, will buy Holcim's stake in ACC. In other words, once the deal is done, ACC will become a subsidiary of Ambuja Cements (see chart).
The swap ratio for the merger will be one Ambuja share for 7.4 Holcim India shares, translating into an implied swap ratio of 6.6 Ambuja shares for every ACC share. Ambuja will issue 584 million new equity shares to Holcim as consideration for the merger. After the merger, the expanded capital base of Ambuja will increase 28 per cent and comprise 1.97 billion shares.
Getting a thumbs down
Holcim, on its website, put up a statement saying, "Holcim simplifies group structure in India". But its key man in India, Weijde knows it won't be that simple to explain it to investors.
The deal was quick to invite the wrath of brokerages and investors' associations who called it "daylight robbery". Some said that this will turn cash-rich Ambuja into a net-debt company, while concerns were also raised about minority shareholders' interest as using the company's cash to buy a stake in ACC had restricted their choice. "The cash could have been used alternatively for a buy-back," said Credit Suisse in a note. "Additionally, Ambuja has committed to acquiring an additional 10 per cent stake in ACC over 24 months. In our view, this will convert Ambuja into a net debt company," the note said.
What really irked investors and analysts is the outflow of almost 90 per cent of Ambuja's cash reserves. Experts say Holcim is in desperate need of cash and has therefore initiated this transaction so that it can raise some funds.
Ambuja's management denies the accusations. Weijde categorically says that the Swiss parent is not in need of cash. However, if one looks at its last few transactions across the globe, one would get a fair sense that Holcim is in cash-raising mode.
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As on 31 March 2013, the Swiss cement giant has a net financial debt of 10.8 billion Swiss Francs, or Rs 68,000 crore, on its balance sheet. Last December, the cement maker had announced restructuring of its European operations. The company had said that the group had introduced a leaner management structure for Europe to adapt better to the lower level of construction activity.
"Measures evaluated and already initiated will lead to annual cost savings of at least 120 million Swiss Francs, a better utilisation rate of the capacity and a more efficient allocation of the capital expenditure. The additional cash costs for restructuring in the fourth quarter of 2012 will amount to approximately 100 million Swiss Francs including site restoration costs. Write-offs of property, plant and equipment will total 410 million Swiss Francs, and will be charged in the fourth quarter of 2012," it had added.
Within weeks of it, several global transactions surfaced. For instance, barely a month before proposing the restructuring of ownership of its Indian operations, Holcim had sold its New Caledonia plant (Holcim Nouvelle Caledonie) to Japanese firm Tokuyama Corporation for an undisclosed sum. The transaction closed on 27 June. In a statement, Holcim had said, "Selective divestments if and when they make strategic sense are an integral part of the group's drive to increase operating profit by 1.5 billion Swiss Francs until 2014 compared to 2011".
Prior to this, in March, Holcim had sold 25 per cent stake in Cement Australia to German cement major HeidelbergCement. Again the transaction value remained undisclosed. Further, last December, Holcim had reduced its shareholding in Siam City Cement of Thailand from 36.8 per cent to 27.5 per cent. The company sold its 20 per cent stake in Cementos Progreso in Guatemala (in December last year) to its majority shareholder Grupo Cemcal S.A Progreso. For the sale of these two share packages, Holcim received around 375 million Swiss Francs, or Rs 2,368 crore.
The India angle
In its India restructuring, the role of independent directors of Ambuja Cements has also come under the scanner.
The transaction was unanimously approved by the board which, the investor associations say, is not in the interest of minority shareholders of Ambuja Cements, and the independent directors, at the very least, should have voiced their concern and put it on record.
The independent directors on the board of Ambuja Cements are: DCB Bank Chairman Nasser Munjee, economist Omkar Goswami, chartered accountants Rajendra Chitale and Shailesh Haribhakti and corporate lawyer Haigreve Khaitan.
"Investors should write to the independent directors stating their angst. Investors should file complaints with the stock exchanges and the Securities and Exchange Board of India, as this will add to the complaints record," says Shriram S of Ingovern Proxy Advisory. According to him, investors should vote against the transaction when it comes up for shareholder approval through a postal ballot. A majority of minority investors will need to approve the transaction, with the promoter getting no vote.
But, it appears, the minority shareholders seem to be unperturbed by the move. According to them, there is no point in opposing it. "It (Holcim) will do what it wants to. I may not have a say in it," one of the minority shareholders told Business Standard.
Amid this commotion, Weijde, has his own story to tell. "People are most upset about the cash payment to Holcim. I acknowledge there is an emotional issue. It is absolutely true that money is going to Holcim. But it (Ambuja) gets something in return. It gets a fantastic investment (in ACC). But people have focussed on that part of the transaction (only)," says he.
Rather, he goes a step ahead to say that it would be a shame if minority shareholders do not understand the benefits of the transaction.
A win-win
"Holcim is not really getting the cash for free. It has to give shares. Holcim was paying money for shares (to buy stake in ACC and Ambuja). And now it is the reverse, though Holcim maintains control, it owns economically less. Holcim is just getting the money it paid, that's it," he emphasises. Holcim had paid $200 a tonne when it bought 13.8 per cent in Ambuja Cements from the Seksharia-Neotia family in 2006 for around Rs 2,100 crore.
The new structure allows for consolidation of balance sheets of the two companies, making it stronger in the process. According to Weijde, if one consolidates the balance sheets (ACC and Ambuja), everything is doubled. "They, still, have over Rs 4,000 crore consolidated cash on the balance sheet. Even if you look at the standalone basis, Ambuja will have Rs 600-Rs 700 crore of cash on its balance sheet making it probably the best on the planet (in the cement space)."
