This story first appeared in DNA Money edition on Friday, July 26, 2013.
Stock market analysts’ verdict on Wednesday’s Ambuja-ACC-Holcim restructuring is emphatic that the deal offers no significant near-term benefits to minority shareholders.
Downgraded by several brokerages, the Ambuja Cements stock fell almost 15% in intra-day trade in Mumbai on Thursday, before recovering a bit to close at Rs 171, down 10.52%. ACC, too, fell and ended at Rs 1,194.10 (down 3%).
Investors did not seem to like Ambuja’s plan to buy a 50% stake in ACC from its parent Holcim at what could prove a significant premium, given the Rs 14,660 crore value of the cash-and-equity deal (which would also raise Holcim’s stake in Ambuja to 61.39% from 50.55%).
Out of 24 brokerages polled by Bloomberg, as many as 13 stamped a ‘sell’ call on the Ambuja stock; four brokerages advised investors to ‘hold’; two each were ‘neutral’ and ‘underweight’; while one each issued ‘underperform’ and ‘outperform’ ratings.
Chockalingam Narayanan and Manish Saxena, research analysts at Deutsche Bank, said in their report that Holcim has effectively shifted its stake in its India business by gaining a greater proportion of a more profitable business and Rs 3,500 crore in cash. “Our calculation suggests that at the current market price, the loss for minority shareholders of Ambuja may vary between Rs 400 crore to Rs 500 crore from this transaction.” Their report issued a ‘sell’ call on both Ambuja and ACC stocks.
Holcim has restricted minority shareholders’ choice by using Ambuja’s cash for ACC’s stake, said Anubhav Aggarwal and Chunky Shah, research analysts with Credit Suisse.
“The cash could have been used alternatively for a buyback. Additionally, Ambuja has committed to acquire an additional 10% stake in ACC over 24 months. In our view, this will convert Ambuja into a net debt company; and from a Holcim perspective, it will be an idle structure as ACC plus Ambuja will be neutral on cash on a consolidated basis and shield Holcim from further rupee depreciation,” they said in a report.
Experts feel that Holcim is the only beneficiary of the proposed restructuring as it stands to pocket $600 million in cash whereas in the old structure, it was entitled to only 50% of Ambuja cash. The cash will help Holcim to reduce its net debt and maintain its investment grade rating, which is essential for keeping its interest costs low.
Calling it a one-sided transaction, Nitin Bhasin and Achint Bhagat, research analysts at Ambit Capital, said Ambuja’s acquisition of ACC will have no meaningful benefits except to Holcim. “This rearrangement does not suggest any value creation for either Ambuja or ACC shareholders and at best is value-neutral for Ambuja’s shareholders, considering the synergies. Holcim benefits by receiving Rs 3,500 crore without sharing any cash with minority shareholders,” said the analysts.
The proposed transaction at current market price (CMP) for both entities implies a valuation of $110 per tonne for ACC. Ankur Kulshrestha, research analyst, HDFC Securities, said that despite inexpensive valuation, majority shareholders of both ACC and Ambuja would end up losing in the deal. “We are very sceptical of the synergies (Rs 900 crore in cost savings over two years) being talked about,” Kulshrestha said in his report.
The primary cause for concern, analysts said, is that Ambuja chose to pay moderate dividends (35-40% payout) over the last few years without reinvesting for growth. And the company is now paying the price by losing market share. “We wonder why this transaction did not involve only shares or why the cash was also not distributed to minority shareholders,” the Ambit Capital analysts noted in their report.
Analysts said there are concerns about reinvestment highlighted by Holcim. For instance, Ambuja has not been reinvesting in capacity expansions despite its large cash pile. It invested capex of Rs 2,000 crore over the last three years and added only 2 million tonne of grinding capacity alongside maintenance capex.
Stock market analysts’ verdict on Wednesday’s Ambuja-ACC-Holcim restructuring is emphatic that the deal offers no significant near-term benefits to minority shareholders.
Downgraded by several brokerages, the Ambuja Cements stock fell almost 15% in intra-day trade in Mumbai on Thursday, before recovering a bit to close at Rs 171, down 10.52%. ACC, too, fell and ended at Rs 1,194.10 (down 3%).
Investors did not seem to like Ambuja’s plan to buy a 50% stake in ACC from its parent Holcim at what could prove a significant premium, given the Rs 14,660 crore value of the cash-and-equity deal (which would also raise Holcim’s stake in Ambuja to 61.39% from 50.55%).
Out of 24 brokerages polled by Bloomberg, as many as 13 stamped a ‘sell’ call on the Ambuja stock; four brokerages advised investors to ‘hold’; two each were ‘neutral’ and ‘underweight’; while one each issued ‘underperform’ and ‘outperform’ ratings.
Chockalingam Narayanan and Manish Saxena, research analysts at Deutsche Bank, said in their report that Holcim has effectively shifted its stake in its India business by gaining a greater proportion of a more profitable business and Rs 3,500 crore in cash. “Our calculation suggests that at the current market price, the loss for minority shareholders of Ambuja may vary between Rs 400 crore to Rs 500 crore from this transaction.” Their report issued a ‘sell’ call on both Ambuja and ACC stocks.
Holcim has restricted minority shareholders’ choice by using Ambuja’s cash for ACC’s stake, said Anubhav Aggarwal and Chunky Shah, research analysts with Credit Suisse.
“The cash could have been used alternatively for a buyback. Additionally, Ambuja has committed to acquire an additional 10% stake in ACC over 24 months. In our view, this will convert Ambuja into a net debt company; and from a Holcim perspective, it will be an idle structure as ACC plus Ambuja will be neutral on cash on a consolidated basis and shield Holcim from further rupee depreciation,” they said in a report.
Experts feel that Holcim is the only beneficiary of the proposed restructuring as it stands to pocket $600 million in cash whereas in the old structure, it was entitled to only 50% of Ambuja cash. The cash will help Holcim to reduce its net debt and maintain its investment grade rating, which is essential for keeping its interest costs low.
Calling it a one-sided transaction, Nitin Bhasin and Achint Bhagat, research analysts at Ambit Capital, said Ambuja’s acquisition of ACC will have no meaningful benefits except to Holcim. “This rearrangement does not suggest any value creation for either Ambuja or ACC shareholders and at best is value-neutral for Ambuja’s shareholders, considering the synergies. Holcim benefits by receiving Rs 3,500 crore without sharing any cash with minority shareholders,” said the analysts.
The proposed transaction at current market price (CMP) for both entities implies a valuation of $110 per tonne for ACC. Ankur Kulshrestha, research analyst, HDFC Securities, said that despite inexpensive valuation, majority shareholders of both ACC and Ambuja would end up losing in the deal. “We are very sceptical of the synergies (Rs 900 crore in cost savings over two years) being talked about,” Kulshrestha said in his report.
The primary cause for concern, analysts said, is that Ambuja chose to pay moderate dividends (35-40% payout) over the last few years without reinvesting for growth. And the company is now paying the price by losing market share. “We wonder why this transaction did not involve only shares or why the cash was also not distributed to minority shareholders,” the Ambit Capital analysts noted in their report.
Analysts said there are concerns about reinvestment highlighted by Holcim. For instance, Ambuja has not been reinvesting in capacity expansions despite its large cash pile. It invested capex of Rs 2,000 crore over the last three years and added only 2 million tonne of grinding capacity alongside maintenance capex.
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