Sucheta Dalal :ACC-Gujarat Ambuja: weak cementing
Sucheta Dalal

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ACC-Gujarat Ambuja: weak cementing  

Jan 24, 2005


Five years before, Gujarat Ambuja Cement Ltd (GACL) and the Tatas blotted their good governance book, when the former acquired a 14.5% stake in the Tata-controlled ACC Ltd, with a Rs 925 crore, two-stage deal, designed to leave retail investors out in the cold. The shares were acquired at Rs 370 each, a 150% premium to the then market price. The takeover was positioned as a strategic alliance and the furore that followed caused takeover regulations in India to be rewritten. At that time, Indian cement manufacturers used to wave the bogey of predatory foreign firms (especially Lafarge) taking over the entire domestic industry. Swadeshi lobbyists were roped in to convince the market regulator to back the controversial deal, without insisting on an open offer.

Now, Gujarat Ambuja has entered into a complicated four-stage deal which will give Swiss cement major Holcim a 67% stake in Ambuja Cement India Ltd (ACIL) and the single largest shareholding in ACC. It is touted as a strategic alliance rather than a sale. The irony is that the transaction is at the same Rs 370 a share which GACL paid to acquire its controversial ACC stake. Details about the deal are still trickling out. For instance, while GACL will double its stake in ACC after the open offer, other information points to a sale by GACL rather than a strategic alliance. After all, retaining a higher stake in ACC through a smaller stake in the controlling entity (ACIL) does not make sense for GACL.

GACL’s spokesperson Anil Singhvi was suitably ambiguous when he told the media, “We have just entered into this partnership and at this moment, we do no have any intention to exit.” However, media reports say GACL has the option of exiting its investment in ACC as early as June 2005. In fact, the exit route is also a complex structure, but the intention is clear. Holcim has reserved the right (call option) to demand a buyout of GACLs stake “any time on or after January 1, 2008,” while GACL has a put option to sell its stake to Holcim after 2006. The call and put options protect the upside and downside risks of both parties to the eventual buyout.

Other signals that this is not a partnership but a sale, are in reports that Holcim is seeking divestment of ACC’s holding in non-core assets such as Everest Industries Ltd (EIL), even before the ink on its deal with GACL has dried. This means at the end of a $800 million investment in India, Holcim will control the second-largest cement manufacturer and become a substantial player in the Indian industry. Lafarge, too, had earlier gained entry into the Indian market by acquiring the cement units of Tisco and Raymond Industries. The question that remains is why GACL, otherwise an aggressive blue-chip competitor, which runs its plants at high operational efficiency, should opt to sell out. Many market watchers believe Gujarat Ambuja was still struggling to digest its expensive and over-ambitious acquisition of the 14.5% ACC stake. As an investor says, Rs 370 five years ago was clearly a mistake.

• Holcim will control the second largest cement manufacturer in India

• The cement deal with Holcim is being touted as a ‘strategic alliance’

Other analysts disagree. They say GACL may have paid more for ACC and bought it at the worst time, but it has turned extremely lucky. The cement industry is doing very well and is now an especially favoured sector among investors, thanks to the expected boom in infrastructure spending. The overall stock market is booming, the shares of both GACL and ACC have risen, commodity prices have jumped, foreign investors are desperate for quality stock and banks are queuing to lend to the best companies. In these circumstances, there was absolutely no reason for GACL to sell out its ACC stake for financial reasons. The reason, they say, has to be personal. According to the market grapevine, Narottam Seksaria’s son, who would probably inherit management control, is uninterested in the business. Some believe this deal may also be a prelude to an amicable separation of joint ownership of GACL between the Neotias of Kolkata (who are in the real estate and leisure business).

But GACL’s stand that it has simply entered into a partnership with Holcim, precludes any discussion on the issue. For the moment, investors are not enthused (the stock prices of both fell sharply on Thursday) and one will have to wait and watch developments to understand why GACL facilitated the entry of the world’s second-largest cement manufacturer into India, after desperately waving the swadeshi flag five years before.



-- Sucheta Dalal