Rude shock for Ambuja minority shareholders

For them, it is a 'sell' or 'reduce' call from brokerage firms

A large number of brokerage reports after the Holcim-Ambuja cement's deal announcement primarily focused on Ambuja Cements' minority shareholders. The overwhelming consensus: They stand to lose from it.

So, 'reduce' or 'underperform' for Ambuja came quickly as the complex restructuring exercise will see the company pay Rs 3,500 crore to Holcim (almost 90 per cent of cash on its books) to acquire 24 per cent. This will dilute the earnings per share (EPS) by Rs 10-11, said brokerage reports.

The share price movement, consequently, reflected this mood, on Thursday. Ambuja's stock price fell the most in two decades. It plunged 14 per cent in intra-day trade before recovering to close at Rs 171, down 10.41 per cent. For minority shareholders, the advice is 'sell'.

Bank of America, Macquarie and Religare Capital cut their recommendations on Ambuja to either reduce or underperform. "A minority-shareholder-detrimental restructuring exercise and weak pricing will hamper earnings' growth outlook and drive our rating downgrade on Ambuja from 'hold' to 'reduce' and our target price is cut to Rs 165 from Rs 180," says Ajit Motwani, analyst at Emkay Global Financial Services.

Shriram Subramanian, founder of InGovern, a proxy advisory firm, has another issue with the deal. "It is clear that Holcim does not care about minority shareholders, neither in this case nor when the royalty issue took place. Even independent directors are not standing up. How did they approve this deal? More, the minority shareholders are being given ACC shares, which they may not have wanted."

Motwani writes the Holcim-Ambuja transaction "dilutes standards of corporate governance that could further impact valuation. More, no eventual merger of ACC and Ambuja would mean the Street would most likely ascribe a holding company discount to Ambuja's investment in ACC." In the cement space, brokerage firm Jefferies prefers ACC as it would benefit from the proposed cost-saving initiatives. Or, some favour Grasim UltraTech Cement.

Some feel the new structure may benefit Ambuja in the long run. Kishor Oswal of CNI Research says Thursday's stock price movement was a knee-jerk reaction and the swap ratio has been factored in the current market price. "If the broader indices move up, so will Ambuja. ACC and Ambuja valuations are comparative. Hence investors should just wait and watch and not redeem holdings."

A majority are pinning hopes on institutional investors to stop the deal like in Satyam-Maytas and Cairn-Vedanta's case. "Institutional investors like LIC which owns a five per cent stake in Ambuja should oppose the deal. Retail investors should send their complaints to the market regulator, as it will have to record their comments about the scheme before it goes to the high court for approval." says Subramanian.