LafargeHolcim initiates merger of Ambuja, ACC

Combined capacity will increase to 63 mtpa

After nearly 12 years of Swiss cement giant Holcim’s entry into India with the acquisition of India’s two largest cement firms — ACC and Ambuja Cements — the parent has set the ball rolling for a possible merger of the two.

Both ACC and Ambuja had their board meetings on Friday, and they concluded with a decision to initiate the process for exploring the possibility of a merger.

Both companies have constituted a special committee of directors, with a majority of them being independent directors, to consider the matter.

Ambuja Cements, in a statement, said: “The board of directors of the company at its meeting today initiated a study to explore the possibility of a merger between the company and ACC, which could enable both the companies to combine their strengths of business so as to benefit all the stakeholders.”

The merger can unlock synergies for the two companies across many fronts — profitability, marketing, distribution, and sourcing, among others, say analysts. Though ACC generated Ebitda (earnings before interest, tax, depreciation, and amortisation) of about Rs 400 a tonne in the March 2017 quarter, Ambuja generated about Rs 597 a tonne at a time when rising costs have been a concern. The merger can help reduce operating costs. 

In 2015, Holcim had merged with France’s Lafarge to create LafargeHolcim. In June 2016, Ambuja had bought Holcim India’s 24 per cent stake in ACC, which resulted in the latter becoming Ambuja’s subsidiary with a 50.05 per cent stake. LafargeHolcim owns 63.6 per cent in Ambuja Cements.

Sources say that the merger would mean an end of ACC, which is one of the oldest cement companies of the country. 

However, both companies’ statements clarified that no decision to merge had been taken at this stage and the same would be considered by the board once a recommendation was received from the special committee of directors and the audit committee. Collectively, the combined capacity of ACC and Ambuja stands at 63 million tonne per annum (mtpa). 

Since Holcim acquired Ambuja and ACC, speculation has been rife about the possible merger of the two. 

Meanwhile, despite being one of the biggest players, Holcim could not grow as fast as its Indian counterpart UltraTech, which belongs to the Aditya Birla group, did. The Birla group was quick in merging Grasim’s cement business into UltraTech Cement, which resulted in a consolidation of brand, higher market share, and value unlocking. UltraTech has also been aggressively acquiring cement capacities from smaller players. 

Shareholders of Ambuja and ACC have been asking on several occasions about the plan for a merger between the two companies. In ACC’s latest annual general meeting, one of the shareholders had asked the management to have a reverse merger with ACC, taking over Ambuja and not the other way around, in order to keep the legacy of one of India’s oldest cement companies continuing. ACC was founded in 1936, while Ambuja Cements came into existence in 1983. 

While the announcement from both companies came after market hours, shares of ACC gained nearly 2 per cent to Rs 1,655.30, while Ambuja’s share gained around one per cent to close at Rs 246.30 apiece.  In terms of valuation, ACC is trading at an enterprise value of $136 a tonne, while Ambuja is trading at $153 a tonne on CY17 estimated capacities, according to HDFC Securities. "The swap ratio for the merger could be decided on the basis of replacement cost or average market price at which the scrips are trading," said G Chokkalingam, founder & CEO, Equinomics Research & Advisory. If Friday's stock prices were considered, the swap ratio works out to 1:6.7 (one share of ACC will fetch 6.7 shares of Ambuja).