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Gautam Adani-led Adani Group will explore the possibility of merging both Ambuja Cement and ACC after completion of the deal with Holcim.
The merger will not only drive efficiency but also bring down costs. Interestingly, Holcim had attempted to merge both the entities but it was resisted as the brands were very strong in the markets they operate in.
In fact, to drive cost efficiency, Ambuja and ACC have merged their back-end operations, including procurement of raw material. It also has a master-supply agreement which provides 5 per cent discount for cement supply to each other on their average net selling price.
Post-merger scenario
Post merger of both the companies, Adani Group will consider issuing warrants to the promoters so that they hold 75 per cent stake in the merged entity, sources said. The ₹81,400-crore deal is expected to be completed in the second half of this year.
Dr Ravi Singh, Vice President and Head of Research, Share India, said the transaction will help the companies slash cost, trim debt and better cope with the soaring energy prices amid weak demand that have hurt the sector so far. Post the potential merger, there could be a consideration for brand consolidation, leading to better margins and higher return on capital employed for the two companies, he added.
Dharmesh Shah, Research Analyst, Emkay Research, said cement industry profitability is largely driven by pricing as the industry utilisation is already high at about 80 per cent while the industry demand-supply dynamics is unlikely to be affected materially even if Adani targets volume growth in line with Ultratech. However, the debt-funded deal will lead to a significant interest burden on the acquirer, he added.
Pricing in the sector
The enterprise value per tonne of the combined entity stands at $167 while it was $198 for Ambuja and $117 for ACC. With the 100 per cent acceptance ratio to the open offer, the deal size will increase to ₹81,400 crore post the open offer of Ambuja Cement at ₹385 a share and ₹2,300 for ACC. After a successful open offer, Adani’s stake in Ambuja and ACC will increase to 89 per cent and 81 per cent, respectively. It has to be seen if the conglomerate will reduce its stakes to 75 per cent or delist the companies.
Manoj Dalmia, Founder and Director, Proficient Equities, said the entry of Adani Group will affect the pricing in the cement sector due to its supplier and muscle power, while the group will benefit from the economies of scale for its infrastructure business.
Ravi Singhal, Vice Chairman, GCL Securities, said though ACC and Ambuja Cement were steadily losing market share, the change in ownership will better the companies’ prospects and make them significant contributions to the Indian infrastructure sector.
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