Sucheta Dalal :An interesting tale of two deals
Sucheta Dalal

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An interesting tale of two deals  

Feb 7, 2005


Is the Everest deal an indicator of industry tensions, or investor angst? 


Two weeks ago, I wrote that Gujarat Ambuja Cement’s (GACL) reason for relinquishing control over ACC to global cement major Holcim was still hazy. Since then, I’ve met Anil Singhvi, GACL’s savvy chief financial officer (CFO), who claimed GACL was not selling out (as suggested by my column), but had entered into a strategic alliance, whereby Holcim agrees to make all future investments in India only through Ambuja Cement India Ltd (ACIL), a holding company for the alliance. He said though GACL had taken a lot of flak for its controversial takeover of ACC through a 14.5% (two-part) acquisition in 1999, the sale to Holcim showed ACC was only a strategic investment (though the high price paid for it was a mistake) for GACL.


Less than a week later, the picture is changing. Even before the ink is dry on Holcim’s deal with GACL, the latter is in a controversy over its attempt to transfer control over Everest India Ltd (EIL), in which ACC holds a 76% stake, to the Adani group, which has a minority holding. On January 24, the Adani group published an open offer to acquire 20% of EIL’s public shareholding at Rs 147 each.


Investors such as Ajay Jindal and SK Khetan of Kolkata have written to Sebi that open offers are only triggered by a substantial acquisition of shares or change in management control. However, on the date of the public announcement, there was neither.


Holcim itself has no control over EIL, since it has merely acquired a part of ACIL’s stake in ACC. And, hence, can’t transfer control over EIL to anyone. In fact, Holcim needs to make an open offer to buy out EIL shareholders, after it first acquires control over ACC through an open offer to its shareholders (as agreed with GACL).


Instead, the EIL open offer announcement states Holcim will propose to the ACC board to sell 76.01% shares to the Adani group at a fair value. Surely, Holcim has no locus standi at this stage to make any such proposal. Moreover, as Anil Singhvi says, if GACL itself was only a strategic investor, how can the acquirer of GACL’s stake arrogate such powers to itself?


The only conclusion: Holcim believes after its entry into ACIL, it has inherited GACL’s control over ACC, not merely a strategic interest. Even then, Holcim cannot jump the gun and sell EIL shares to the Adani group until ACC shareholders ratify the deal. On the contrary, Holcim will first have to make an open offer to EIL’s public shareholders And since it already holds a 76% stake in EIL, it may have to adopt the reverse book-building route, which allows shareholders a say in the exit price.


• GACL claims it has only entered a ‘strategic alliance’ with Holcim

• Takeover rules have to be followed in letter, spirit and in proper sequence


Only after these procedures are complete will Holcim have the right to enter into a deal with the Adanis. It is strange that a multinational company and its savvy Indian strategic ally did not foresee these obvious legal issues.


Next comes the question of the offer price for EIL. Many investors have written to Sebi claiming the Rs 147 offered by the Adani group is unfair since ACC/Holcim are transferring a controlling stake (76 %) in EIL. These shareholders claim a fair price for EIL shares ought to be substantially higher—Rs 230-250. More pertinently, they point out that unless the Adani group decides and declares the price that it will pay Holcim for the 76% controlling stake, how can it announce a price or make an open offer to buy 20% of the public shareholding?


One Mr Bajranglal Dharewa has gone a step further in challenging the ACC management. He has sent a proposal to the ACC management, offering to buy out its holding in EIL along with persons acting in concert with him, at a fair value, subject to due diligence. This letter is backed by a cheque of Rs 10,000 as token earnest money.


Is this flurry of letters a sign of genuine investor outrage, or does it represent concerted action by corporate rivals to sabotage Holcim’s spectacular entry into the Indian marketplace? It is probably a combination of both; that is why ACC shares have shot past Holcim’s open offer price of Rs 370 in anticipation of a takeover battle.


The motives of the objections do not matter. What is more important is that the takeover rules have to be followed in letter, spirit and in proper sequence. Technicalities such as shareholder approval should be properly complied with. But, so far, the regulator has chosen to remain a silent spectator, as usual.

-- Sucheta Dalal