The proposed merger of ACC and Ambuja Cements, both group companies LafargeHolcim of France, is indicative of the larger wave of the cement sector consolidation, according to experts. While analysts think the full synergy may take two-three years to come through, after the formalisation of the merger, capital market on Monday responded positively to the amalgamation idea.
LafargeHolcim itself was formed by merging Lafarge of France and Holcim of Switzerland.
Shares of Ambuja Cements and ACC rose on BSE on the first trading day after both the companies decided to explore a potential merger.
Ambuja Cements’ scrip surged 5.89 per cent to end at Rs 260.80 (during the day, it jumped 9.82 per cent to Rs 270.50). ACC gained 3.57 per cent to close at Rs 1,714.40. The two leading cement makers on Friday said their respective boards had agreed to start the evaluation of a potential merger between the two firms “with a view to combine the strengths of both businesses.” If the merger goes through, the combined entity will have a turnover of over Rs 20,425 crore based on their respective revenues in 2016.
The merged entity will be India’s second biggest cement company in terms of market value. Ultratech Cements, which was created by consolidating the cement operations of L&T and the A V Birla Group, will still remain the largest cement company in India.
“LafargeHolcim owns 66 per cent in ACC and 55 per cent in Ambuja Cements. The proposed merger appears to be timed to capitalise on the emerging opportunities in this sector. India is already the second largest producer of cement in the world. But India’s cement consumption per capita is much lower than other emerging markets. India’s cement capacity is expected to rise to 550 million tonnes per annum (MTPA) by 2025. That will still be 1/5th of China’s capacity, but the inevitable journey towards consolidation has surely begun,” said Angel Research.
At present, Ambuja-ACC swap ratio is 6.7x while 6-month average has been 6.3x. A swap ratio of less than 7x, according to an analysis by JM Financial, will ensure promoter shareholding of greater than 50 per cent. Based on this analysis, realisation of merger synergies will present a 15-20 per cent upside in Ambuja.
The ACC-Ambuja merger idea was first floated in 2013 where synergy benefits of Rs 920 crore were expected to be realised on logistics cost savings, fixed cost reduction, procurement savings etc. On Monday, ACC’s market valuation rose by Rs 1,110.25 crore to Rs 32,194.25 crore and that of Ambuja surged Rs 2,879.63 crore to Rs 51,785.63 crore.
Motilal Oswal said the merger may benefit both the companies and earnings may potentially get upgraded by 10 per cent for the combined entity depending on quantum of synergy benefits. “However, multiple re-rating of the stocks would be function of risk associated with realisation of synergy benefits and clarity over expansion plans of the group over 2-3 years in order to maintain market share,” it said. Global brokerage firm CLSA said ACC should merge into Ambuja and then there would be lot of synergy benefits in logistics, manpower, and selling, general and administrative expenses.
