Holcim stops short of merging ACC and Ambuja, makes a cash windfall

A merger of Ambuja Cements and ACC has been long speculated upon, since both are owned by the same parent company Holcim. On July 24, Ambuja Cements declared its results and also announced a rather complex restructuring to bring ACC into its fold.

After the entire scheme is given effect to, the parent company Holcim will own a 61.4% stake in Ambuja Cements. Ambuja Cements will own a 50.01% stake in ACC. Ambuja will also try to hike its stake to 60% in ACC through the creeping acquisition route. The proposal stops well short of a formal merger of both companies and is more of a simplfied holding structure, where Ambuja Cements replaces Holcim India as the holding company in the country.

In the current situation, Holcim has a subsidiary in India called Holcim India, a private limited company, and a subsidiary of Mauritius-based Holderind Investments. Holcim India owns a 50.01% stake in ACC and a 9.76% stake in Ambuja Cements. Holderind owns a 0.29% stake in ACC and a 40.79% stake in Ambuja Cements.
Thus, Holcim group owns a 50.55% stake in Ambuja Cements and a 49.71% stake in ACC.

Why a merger? Both companies are in the same business of making and selling cement. Even before this development, as is common for subsidiaries of multinational companies, they have been using common services for functions such as information technology, procurement and technical.

So what would a merger achieve? In the cement business, size does not get you much in the market because it’s a very regional affair. That is, companies in the South may be very strong in their region but freight costs will mean that they cannot be competitive in, say, North India.

But what a formal merger can achieve is to achieve cost synergies at the senior management levels, across functions—both corporate and manufacturing. A single board of directors and elimination of duplicate functions can mean considerable savings for a company. It also means a much larger balance-sheet, which can translate to better raising and utilisation of resources.

But this is a half way house, where ACC becomes a subsidiary of Ambuja Cements. That does create some fungibility between both companies, in terms of sharing each others resources and balance-sheet strengths. A more detailed analysis of the transaction will become available shortly. Keep watching this space.

Read the press release on the transaction here (link) and also view the presentation made by the management here (link).

Update: As promised, here is a detailed analysis of the transaction (link). The transaction appears to be fair to minority shareholders, though they would have been happier if cash had not gone out of Ambuja Cements.

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