US Fed rate hike raises cost of funds for Ambuja Cements bidders

The US Fed rate hike has sent Ambuja Cements bidders back on the drawing board as their cost of funds is set to rise significantly, said bankers. The cost of funds has risen as high as 13 per cent yearly overseas for the acquisition, they said.

Soon after the surprise rate hike by the Reserve Bank of India (RBI), the US Fed increased its rate by 0.5 per cent last week, thus making costs of funds high for the potential acquirers. Most of the Indian bidders of Ambuja Cements are planning to raise funds from the Middle East-based funds and private equities (PEs)/hedge funds as debt. Some of the PEs may pick up a stake in the special purpose vehicle (SPVs) created for the acquisition.

“All the bidders started re-looking at the funding structures and the expected profitability of Ambuja Cements and its subsidiary, ACC, based on the cost of acquisition after the hike,” said a banker close to the development.

The Adani, JSW groups, and Ultratech have made the non-binding bids and an announcement is expected before May 15. As the non-binding bids have been submitted, Holcim will start exclusive talks with the winning bidder who can close the deal early, the banker said.

The acquisition is expected to cost around $10 billion (Rs 76,000 crore), including the open offers for the shareholders of both Ambuja Cements and ACC. Of this, the bidder will have to raise up to $8-8.5 billion in debt while the rest will be invested as equity by the winner. As Indian banks cannot invest in the acquisition of shares, the bidders are looking to raise debt from foreign funds. “Half a per cent rise for debt worth Rs 35,000 crore to Rs 45,000 crore is huge. The bidders will have to arrange for additional funds or put more equity on the table,” said a banker.

The funding requirement will also go up as several institutional investors, including mutual funds and the Life Insurance Corporation, plan to exit once the open offers are launched, bankers said.

“As the US Fed and the RBI raised the rates by half a per cent each last week, the actual cost of funds for Ambuja bidders will be very, very high as all the bidders are planning a leveraged buyout,” said international finance consultant Prabal Banerji.

Banerji says the rate hikes will continue to go up in the rest of the financial year ending March next year with rising prices across the world.  “I expect rates to go up by at least 3 per cent more as inflation is very high. The cost of such leveraged buyouts like Ambuja may be exorbitantly higher than expected as lenders will price in future hikes as well unless it's a variable pricing,” Banerji said.

The entire acquisition process, including open offers, are expected to complete by March next year.

The sale of Swiss cement major Holcim’s India units — Ambuja Cements and ACC — comes at a time when the Competition Commission of India (CCI) is probing the companies for cartelisation.

A Holcim official said the Indian units are closely cooperating with the CCI officials. On December 10, 2020, the CCI had initiated a fresh probe against Indian cement companies and raided several cement producers. On the same day, Ambuja Cements and ACC, in a regulatory filing, had said the CCI initiated the investigation regarding alleged anti-competitive behaviour. A penalty imposed by the CCI on Ambuja and ACC and eight other cement companies is currently pending in the Supreme Court.