Adani wins bid for control of Ambuja Cements and ACC

16 May 2022 , 03:49 PM

The uncertainty over the potential buyer of the Holcim stake in Ambuja Cements ended on Sunday 15th May evening. The Adani Group and Holcim issued a press release stating that Adani was the successful bidder for Holcim’s stake in Ambuja Cements and ACC. Over the next couple of quarters, two of the most iconic cement companies in India, will subsume into the Adani group. That is some nostalgia, but we will leave that out for now.

How has the Adani-Ambuja-ACC deal been structured?

The overall acquisition deal will cost Adani about $10.5 billion. Here are some important aspects of the deal to know.

• Currently Holcim owns 63.2% stake in Ambuja Cements and a 4.48% stake in ACC through its investment arm. However, Ambuja Cements already holds 50.05% stake in ACC, so the deal becomes a lot more convoluted.
• As the first step, Adani will pay Holcim Rs.385 per share for its stake in Ambuja Cement and Rs.2,300 per share for its stake in ACC. That represents a premium of 7.3% for Ambuja Cements and 8.8% for the shares of ACC over the Friday closing price.
• This premium can be interpreted as control premium for a large sizable stake, which is the norm. Overall, for the two stakes combined, Adani will pay Holcim a sum of $6.5 billion in cash.
• However, there will be substantial acquisition of stake in both the companies with change in control. Hence, Adani will be required to make an open offer to non-promoter shareholders of Ambuja and ACC to acquire up to 26% additional in both companies.
• Adani is expected to pay another $4 billion for this open offer to buy an additional 26% stake in Ambuja and in ACC. This will take the total outlay for the overall acquisition of Ambuja and ACC to $10.5 billion.
• Once the open offer is consummated, depending on the response, Adani will have around 89% stake in Ambuja and 81% stake in ACC, giving them virtual control over both the companies. Under SEBI guidelines, promoters cannot hold above 75% in a company.
• Hence, Adani will have to exercise one of the choices. It can announce a plan to delist both the companies by reducing the public holding to below 10%. Alternatively, it can take the promoter stake below 75% in a phased manner as per SEBI guidelines.

Is the deal too pricey?

The one question that does arise in this case is whether Adani has paid a steep price to gain full control of Ambuja and ACC? That too, at a time when the world’s largest cement company, Holcim, has been exiting its cement franchises in emerging markets like Brazil and India. Let us look at some of the numbers.

Let us first put things in perspective. The Adani Ambuja deal has been struck at $163 (EV per tonne). However, the same Holcim had paid $206 (EV per tonne) when it had acquired a stake in Gujarat Ambuja back in the year 2006. However, if you compare with other deals, then this deal does look pricey. Check out this table for reference.

Year	Buyer	Seller	Capacity	EV per tonne
2022	Adani Group	Ambuja / ACC	70.00 MTPA	$163
2018	Ultratech	Binani Cement	6.30 MTPA	$150
2016	Nuvoco Vistas	Lafarge India	11.00 MTPA	$130
2016	Birla Corp	Reliance Cement	5.60 MTPA	$130

Some of the other deals were either distress sales or they were intra-group deals, which we are not considering. If you look at the above table, then Adani deal for Ambuja and ACC is surely pricier than the other similar deals, but if you consider the massive capacity they get at one shot and the inflation adjustment, then the price may not be really too steep.

However, there are concerns over the EBITDA / tonne that these two cement companies generate. While Shree Cements still has the best EBITDA/tonne, followed by Ultratech, ACC has traditionally had very low EBITDA/tonne. With ACC and Ambuja combined, the weighted average EBITDA/tonne would be around $1,100/tonne, which would be much lower than Shree Cements or Ultratech. How this is scaled up remains the challenge.

One favourable aspect of the deal is that it will not face problems with the Competition Commission of India (CCI). Unlike Ultratech or Shree Cements, Adani does not have a cement franchise and hence the risk of creating a monopoly or duopoly does not arise.

Why exactly did Adani pay top dollar for the Holcim stake?

What could be the reason for Adani paying top dollar for the Holcim stake in Ambuja Cements and ACC? Broadly, there is a macro reason, a synergy reason and a franchise reason. Let us look at the macro reason first.
India’s per capita consumption of cement is less than half of the global average. But what is more glaring is that the per capita cement consumption is one-seventh of China. That is a huge potential for demand growth. Adani expects this cement demand growth to emanate from affordable housing and infrastructure thrust. That would more than justify the high price paid.

The second is the synergy effect. Adani already has a very strong franchise in the construction and infrastructure space. Be it in power, ports, infrastructure or housing; Adani group needs a lot of cement internally. This ensures a steady supply of cement at controllable cost. Also, since Adani group is  Green First business, it can also address the challenges of the carbon footprint of cement.

Finally, there is the business franchise case for paying a premium for the stake in Ambuja and ACC. What the combined entity provides to Adani is formidable, not just in its size but also in its reach. The deal gives the Adani group 70 MTPA installed capacity, directly making it the second largest cement player in India. It also gets a total of 23 cement plants and 14 grinding plants, apart from 80 plants manufacturing ready mix concrete (RMC).

That is not all. They get more than 10,700 skilled employees with deep insights and legacy in the cement industry, not to forget a massive network of over 50,000 channel partners. If Adani is able to create a cement behemoth that is also green and clean, it would be worth every penny paid for the stake. And, perhaps more!