After cement majors Ambuja and ACC called off the plan for a proposed merger for the time being citing constraints, global brokerage firms Deutsche Bank and CLSA say that costs seem to be bey a key constraint. ACC said yesterday that on the basis of a comprehensive evaluation carried out by both the Special Committee, which was set up to study the possibility of the merger, as well as the Board of Directors, the Board notes that that there are at present certain constraints in implementing the merger between the company and Ambuja Cements.
However, the eventual merger, which create India’s second largest cement maker, still remains the “ultimate objective”, according to a joint release by Ambuja and ACC. Notably, both the companies are owned by LafargeHolcim. The multinational giant LafargeHolcim owns more than 63 percent stake in Ambuja Cements, and 50.5 percent stake in ACC through ACL, and another 4.5 percent through one of its investment arms.
Deutsche Bank observed that the transfer of limestone mines seems to be a key constraint in the merger. In May 2017, the two companies had agreed to evaluate a potential ACC-Ambuja merger ‘with a view to combine the strengths of both businesses’. Deutsche Bank observes that the interim arrangement between the companies is likely to be on logistics. In the regulatory filing, ACC said that while the merger has been called off for now, In the meantime, with the intention to maximise synergies between the companies and unlock value for the shareholders, the Board has approved the arrangement with ACL for mutual purchase and sale of materials and services.
On similar lines, CLSA said that transaction costs seem to be prohibitive between the companies. Further, the brokerage firm says that the merger may not go through unless there is regulatory change. Notably, both Deutsche Bank as well as CLSA have a buy call on the shares of CLSA. DB has a target price of Rs 2,010 on ACC shares while CLSA has a target price of Rs 2,050. ACC shares closed at Rs 1,647 on NSE. DB’s target price implies an upside of more than 22% from the current market prices.
In case of Ambuja Cements, Deutsche Bank has a hold call with a target price of Rs 275 and CLSA has a buy rating target price of Rs 375. Ambuja Cements shares were trading at Rs 255.5. CLSA’s target price implies an upside of more than 47% from the current market prices.