The complex transaction through which Holcim has sought to restructure its Indian subsidiary received a thumbs down by majority of analysts on Thursday with proxy advisory firms calling it against minority shareholders and advising shareholders to vote against it. The impact was seen on shares of Ambuja Cements (ACL) and ACC, which closed 10% and 3% lower on the BSE.
In a two-step deal, Ambuja Cement late on Wednesday said it will first buy 24% stake in Holcim India for R3,500 crore and, then, Holcim India will be merged into Ambuja through a share swap.
Brokerages and fund houses have also come down heavily on the deal structure. JPMorgan, in a note, said that after the deal is struck, Ambuja Cements would be able to gain access to its cash only through dividends. Jefferies has also revised its target price to R187, while maintaining ?hold? on the stock.
?Right now, since the entire cash pile in Ambuja Cement has gone, funding future capex plans will be an issue. The companies have been talking about synergies (in terms of company, brand management) for the last eight years, but have not done anything so far. So, what is the point of the whole deal? Also, the government will stand to lose out on tax as the transfer is happening from Holcim Mauritius ? India has a double tax-avoidance agreement with Mauritius,? said a fund manager.
Morgan Stanley wrote in a report: ?While the deal is attractive for Ambuja from a valuation perspective, as it is paying a nominal 2% premium to ACC?s current price and EV/ton of ~$115, we expect the Street to focus on the issue of common parentage, particularly with Holcim getting R3,500 crore in cash. In addition, the Street will likely assign a holding company discount of around 20-25%,in our view to Ambuja?s stake in ACC, which implies erosion in the value of Ambuja?s investment in ACC.?
The deal mechanism that has been worked out would hurt the minority shareholders of ACL, say market experts.
?The deal will be negative for minority shareholders. The intention seems to transfer cash on books of Ambuja Cements…it seems to be a happy co-incidence that the amount being spent on issuing shares to Holcim is almost equal to the cash on the books of Ambuja,? observed Amit Tandon, MD, Institutional Investor Advisory Services India (IiAS).
IiAS has also advised shareholders to vote against all resolutions that would be put forth by the company regarding the deal. These could be issuance of shares of Ambuja to facilitate the share swap, scheme of arrangement through courts and increase of future stake in ACC, the firm said in a statement.
Holcim has said the new structure will help the company unlock synergies from Ambuja and ACC in logistics and supply chain and will put the cash in Ambuja to ?better use? as it will double the capacity.
However, Tandon argues, ?If the intention was to create synergies as it is claimed they would have merged the two organisations (ACL and ACC). Shareholders in Ambuja will get diluted down. Also, Holcim?s holding in Ambuja would now increase?. On Thursday, ACL share was hit the worst as the deal would make the cement maker shell out almost all cash on its books at R3,500 crore for a 24% stake in Holcim India. Stocks of the Gujarat-based company closed at R171, its lowest level since April 10, making the scrip the worst performer in BSE 500 universe. The ACC share closed at R1,194.10.
Ambuja is also supposed to issue to Holcim 58.4 crore new shares, which will take the deal value to R14,500 crore in all stock and cash, at the current market value. With this, Holcim?s stake in Ambuja will increase to 61.39% from 50.55% at present. Then, Ambuja in turn will acquire Holcim?s 50.01% stake in ACC.
However, there is a differing opinion coming in from the deal makers circle. “Multi national corporations often raise capital from their subsidiaries when they require it. There is nothing wrong with this as long as it does not hurt interests of other shareholders,” said a senior official with an advisory firm on conditions of anonymity.
