It’s no surprise that Ambuja Cements’ share price fell almost four per cent and ACC’s was down about two per cent after the companies announced on Monday evening they were not pursuing the merger announced in May last year. Investors were keenly looking forward to the merger, given the synergies and cost benefits. Ambuja had bought Holcim’s majority stake in ACC, making ACC its subsidiary. The holding company’s structure has led to Ambuja Cements trading at a huge discount, while none of the synergy benefits that were to happen in 2-3 years are evident, though five years have passed since the 2013 restructuring. Many on the Street were disappointed with the latest news. Anil Singhvi, former managing director and chief executive officer of Ambuja Cements, and Chairman and founder of Ican Investment Advisors, a corporate advisory firm, said the companies should have been merged in 2013 itself and minority shareholders would see no benefits in the absence of a merger. Operating performance of Ambuja Cements and ACC has lagged others such as UltraTech and Shree Cement, Singhvi added, pointing to the other mergers in the industry — Dalmia Cement-Orissa Cement, UltraTech’s acquisition of Jaypee assets. Last year, Ambuja Cements and ACC had said there were potential post-merger synergy benefits of about Rs 9 billion. A special committee of directors was formed to explore merger possibilities, raising hope among investors. The combined entity, with a capacity of 63 million tonnes, would have been better placed to take on competition. 
Both ACC and Ambuja, however, have indicated they intend to maximise synergies by an arrangement for mutual purchase and sale of materials and services. But further details are crucial to assess the benefits. The companies said the arrangement would be provided in the notice for the postal ballot, proposed to be filed with exchanges shortly. Analysts, though, are disappointed. Antique Stock Broking said the announcement was a negative for both companies. The outlook on fructification of these swap-based synergies was hazy, it said. Analysts at JM Financial said synergy benefits would be much lower in the current arrangement.
This was because back-end processes (marketing, sales, human resource and finance) might remain separate, while procurement could be streamlined. Of the Rs 9 billion synergy benefits indicated through the merger, Rs 3.6-4.2 billion were linked to material swap and Rs 4.2-4.8 billion linked to shared services and fixed costs.
Though Ambuja owns a majority stake in ACC, synergies could not be realised in the absence of a merger. In some geographies, the two strong brands still compete with each other. Therefore, a mechanism to ensure that one brand does not benefit at the expense of other was needed. Rakesh Arora, managing partner, Go India Advisors, said integration of brands and related asset benefits would not accrue without a merger. The limited synergy benefit in the new arrangement could also limit the re-rating of ACC stock (calendar year 2019 estimated EV/Ebitda at 11x versus Ambuja at 13x). EV stands for enterprise value and Ebitda for earnings before interest, tax, depreciation and amortisation. Other analysts said the re-rating of the two stocks would be hit. Binod Modi of Reliance Securities said while UltraTech was able to command EV/Ebitda of 14-15x, ACC and Ambuja get much lower multiples of 11-12xEV/Ebitda. With the merger not happening, the chances of re-rating in the near-term have been dashed. Modi also said Ambuja could have seen higher re-rating as it lacked clinker capacities (which it would have got from ACC if the merger had happened). JM Financial said Ambuja faced clinker capacity constraints over two years (93.5 per cent clinker utilisation expected in CY18). Analysts said the delay in merger was due to issues involved in the transfer of limestone assets, as new mining development rules do not allow transfer of allocated mineral assets. Nevertheless, a merger remains the best suited solution, given that the share prices have lagged when compared with peers such as UltraTech and Shree Cement. The competition has done well on the bourses, thanks to their better financial performance in the past several years.
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