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S. Vaidya Nathan

GUJARAT Ambuja Cements has cut a deal that ensures a handsome payoff for its shareholders for its decision to buy a strategic stake in ACC five years ago even as Holcim of Switzerland acquires a major presence in the cement industry in India.

The deal gives Holcim a controlling stake in the investment vehicle - Ambuja Cement India. If the proposed open offers go through, it would give Holcim a stranglehold on Ambuja Cement Eastern, and bestow it effectively with a stake of about 33 per cent in ACC, which will enable it to call the shots in the latter.

Ambuja Cement India was created in 2000 and vested with the group's stake in ACC and Ambuja Cement Eastern to raise equity and quickly cut the debt burden that Gujarat Ambuja had accumulated in buying out the Tatas from ACC.

The FIIs that picked up a 40 per cent stake now exit with an annual return of about 10 per cent. The shareholder agreement required the Ambuja group to provide an exit option for the FIIs at the end of five years.

The Holcim deal achieves this purpose as the period draws to a close this quarter.

In contrast to the modest returns for the FIIs, the pricing of the deal and the scaling up of stake in ACC translates into a return in excess of 20 per cent for Gujarat Ambuja though this remains on paper for now; should Gujarat Ambuja decide to sell its stake of 33 per cent at a later date, it is likely to ensure that at least this level of return sets a base for the pricing.

By entering into a strategic alliance, Gujarat Ambuja has ensured that Holcim works in tandem and it does not have to contend with the global major as an aggressive competitor.

Holcim gets into a position of strength only in ACC and Ambuja Cements that have a long way to go before they can hope to consistently match Gujarat Ambuja on operating efficiency and profitability.

This is also likely to ensure that the alliance lasts for a lengthy period and be terminated at a time of Gujarat Ambuja's choice and pricing preference.

Ever since the Ambuja-Tata deal in 1999, we have held the view that Gujarat Ambuja would not merge ACC with itself due to the wide gap in operating efficiency, profitability levels and vintage of the capacities. We had maintained that it would not cede its strategic hold on ACC, unless it secured an attractive price. Now Gujarat Ambuja has not only ensured the latter but it will also effectively have a stake of about 17 per cent in ACC. This deal increases its stake in ACC without an open offer of its part and any incremental cash outlay.

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Swiss co Holcim cements deal with Ambuja for ACC

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