Proxy advisories no longer a bit player

In latest sign, Holcim reaches out to clear air on deal, with concall among three advisory firms that raised governance issues

In an unprecedented move, the top management of Holcim, the Swiss cement major, has reached out to the proxy advisory community to address their concerns on its restructuring plan.

This is a boost for the fledgling proxy advisory movement in India. It is the first occasion when a company has taken a  structured move to address this constituency.

On July 24, the board of directors of Ambuja Cements, a Holcim subsidiary, unanimously approved a proposal wherein it would first acquire a 24 per cent stake in Holcim India from Holderind Investments Ltd, Mauritius, for Rs 3,500 crore in cash, followed by a merger of Holcim India into Ambuja. These intra-group transactions will result in Ambuja holding 50.01 per cent stake in ACC Ltd.  

Most analysts have downgraded both Ambuja and ACC and their scrips fells. Proxy advisory agencies criticised the move, raised several governance issues and dubbed it “anti-minority investor”. The founder of one of these even called the deal a “fraud.”

Following this, the foreign investment bank advising on the transaction approached the proxy firms. “Through an investment bank, the company approached us for a one to one meeting to discuss the proposed restructuring. As a policy, we don’t meet listed companies during the AGM (annual general meeting) season, to avoid any potential for conflict of interest situations. However, in this particular case, SES felt it could use the interaction with the company as an opportunity to understand the transaction better and, therefore, perform a more detailed and insightful analysis for shareholders,” J N Gupta, founder of SES, told Business Standard.  

Gupta said he did not agree to a private interaction and demanded all other proxy firms be also called. He also insisted the details of the call would not be confidential. To his surprise, all conditions were readily agreed to.  

Senior officials from the company and the investment banks were present during the call. Representing the company were Onne van der Weijde, the Holcim area manager for India and managing director of Ambuja Cements; G Anantharam, India vice-president, treasury & investor relations at Ambuja;  Sanjeev Churiwala, chief financial officer at Ambuja, and Samuel Poletti, head, strategy and business development-India, at Ambuja/ACC.

According to reports, Polletti will be spearheading plans to bring together the operations of the two companies. Four officials from the investment bank also logged in to the call that took place on Saturday.  

Proxy advisory firms now reach a lot of investors and are emerging as a good way for companies to communicate with the market, said Amit Tandon, managing director (MD) of Institutional Investors Advisory Services (IiAS). “Typically, we try and send out to the company the report we put out before it goes on the website or public domain, just to check whether they have any clarifications. In that sense, companies have been engaging with us but this time it was more structured, where they had a concall with all the proxy advisory firms and explained the transaction,” he said.

Shriram Subramanian, founder and MD, InGovern Research Services, said it is global practise for companies to reach out to proxy advisory firms.

In some cases, proxies have even supported promoter moves. Recently, Institutional Shareholder Services (ISS), a top proxy advisory agency, recommended that Dell shareholders vote in favor of a deal allowing the company’s founder and an investment firm to buy the computer maker and take it private. Michael Dell and Silver Lake Partners have offered to buy Dell Inc for $13.65 a share or a total of $24.4 billion. Michael Dell believes he can turn the company around by taking it private and diversifying into niches, such as business software, data storage and consulting.

But Carl Icahn, a billionaire investor and Dell’s second-largest shareholder, said he wanted Dell to remain publicly traded and boost value for shareholders by buying back $16 bn in stock. ISS backed Michael Dell’s proposal and said Icahn didn’t have adequate financing for his plan. Following this, Dell has raised his offer and demanded certain changes in voting rules.

According to Subramanian, a lot of multinational corporations are attuned to the role played by proxy firms and progressive Indian companies are now awakening to this practice.

“In the past three years, many Nifty and Junior Nifty companies have been engaging with us. Globally, a lot of institutional investors like mutual funds and pension funds opt for auto voting, where the recommendations made by the proxy advisory firm are auto voted by the fund through the custodian. Earlier, voting for or voting against never mattered. But, increasingly, institutional investors are asserting their rights and voting in shareholder meetings, especially on contentious issues,” Subramanian said.

ADDRESSING CONCERNS

Issue raised: Ambuja shareholders will be hit as no cash flow generated at ACC  
Mgmt reply: ACC is clearly generating strong cash flow, as it is valued at 8-9x Ebitda

Will ACC now pay royalty to Ambuja?  
It will continue to be paid to Holcim  

Couldn't you have achieved synergies in current structure?  
Proposed transaction allows to create the alignment through both ownership shareholding and India management structure

Why not do a straight merger then?
Merger requires a lot of time, takes up a lot of management bandwidth, not possible under the current structure

Why are you using cash as part consideration vs. all stock?
Use of cash more beneficial from minority shareholders perspective, as it reduces their dilution vs. an all-stock merger and is more EPS-accretive

How long would it take for synergies to accrue?   
2 years post completion

Any plans to merge ACC into ACL?
At some point of time it can happen and is probably the next logical step but not the intent now

Why ET article on July 2 related to merger was denied?  
The proposed transaction is completely different from the one published

Source: SES report