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ACC-Ambuja merger?
Media reports have speculated that Holcim may merge ACC-Ambuja in the near
future; the recent stake increase in ACC by Holcim has further fuelled the fire. The
merger should result in significant synergistic benefits, though, our detailed
interactions with industry participants indicate that there are various issues which
need to be addressed and merger is unlikely to be consummated in the next 5-6
quarters. The recent stake hike nonetheless signals that Holcim finds current
valuations reasonable. We prefer ACC over Ambuja on operational parameter.
Holcim’s 2.6% increase in stake in the last three months…
‰ Holcim has acquired 2.6% in ACC over the last three months, post which, its
holding is now at ~49%; this comes after more than two years (in Sep-08).
‰ Holcim’s stake in Ambuja remains unchanged at 46.4% (no change since Dec-07).
‰ We note that Holcim acquired ACC (from Ambuja) in 2005, Ambuja in 2006.
… has again fuelled speculation on ACC-Ambuja merger
‰ We also note that the merger has been widely speculated in the past as well.
‰ While the increase in stake may not necessarily imply merger, media reports
speculate that this is another step towards consolidation of businesses in India.
‰ Media also indicate that Holcim has appointed various consultants for the merger.
While merger should drive synergies…
‰ Our past interactions with the managements of ACC-Ambuja indicate that while
they continue to operate as two entities, there are areas (supply chain,
procurement, IT etc.) where the two have already been working together.
‰ Despite potential for significant savings, there has not been much integration in the
areas of logistics (freight due to market overlap), marketing, human resource etc.
‰ E.g. through cross branding/packing, a plant which is closer to the target market
could manufacture both brands which could drive significant freight cost savings.
… and would create largest cement entity in India…
‰ The potential merger of ACC-Ambuja could create the largest cement company in
India with a 57mt of total capacity (expanded).
‰ The merged entity would also become the largest cement company in terms of
market cap of over US$9bn based on current stock prices.
‰ The merged entity would also have strong balance sheet position (as is the case for
both ACC-Ambuja) with net cash of over US$1bn (based on Dec-10 results).
… feedbacks indicate that it may take at least 5-6 quarters more
‰ Our interactions with cement industry participants indicate that unlike UltraTechGrasim consolidation, there are issues which need to be addressed the final merger.
‰ Human resource is a key area where the two companies need to work on,
particularly because, there would be duplication of roles currently across functions.
‰ Considering India is predominantly a retail market, branding plays an important
role. Given both have strong brands, the decision to migrate to a uniform brand
may not be that easy and there has not been any visible work on this front so far.
‰ In this context, it is useful to note that Aditya Birla group worked on operational
integration much before the final merger (in 2010). For example, Grasim-UltraTech
moved to common brand, ‘UltraTech Cement’ in 2007 itself.
‰ Similarly, integration of marketing, supply chain etc. means that the group first
needs to work on operational integration before the final amalgamation.
While we are negative on both, prefer ACC on operation parameters
‰ We are negative on the cement sector due to our concern on demand-supply
imbalance resulting in pricing pressure impacting sector margins.
‰ Based on our interactions, we believe that merger is still 4-6 quarters away.
‰ However, recent stake hike by Holcim would likely provide support to the stock
prices and also signals that Holcim finds current valuations reasonable (closer to
replacement costs).
‰ While we have negative recs on both the stocks, we would prefer to play ACC over
Ambuja on operating parameters like better volume growth potential
(commissioning of new capacities leading to market share gains), higher proportion
of domestic coal, operating leverage benefits (coming in from new capacities).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ACC-Ambuja merger?
Media reports have speculated that Holcim may merge ACC-Ambuja in the near
future; the recent stake increase in ACC by Holcim has further fuelled the fire. The
merger should result in significant synergistic benefits, though, our detailed
interactions with industry participants indicate that there are various issues which
need to be addressed and merger is unlikely to be consummated in the next 5-6
quarters. The recent stake hike nonetheless signals that Holcim finds current
valuations reasonable. We prefer ACC over Ambuja on operational parameter.
Holcim’s 2.6% increase in stake in the last three months…
‰ Holcim has acquired 2.6% in ACC over the last three months, post which, its
holding is now at ~49%; this comes after more than two years (in Sep-08).
‰ Holcim’s stake in Ambuja remains unchanged at 46.4% (no change since Dec-07).
‰ We note that Holcim acquired ACC (from Ambuja) in 2005, Ambuja in 2006.
… has again fuelled speculation on ACC-Ambuja merger
‰ We also note that the merger has been widely speculated in the past as well.
‰ While the increase in stake may not necessarily imply merger, media reports
speculate that this is another step towards consolidation of businesses in India.
‰ Media also indicate that Holcim has appointed various consultants for the merger.
While merger should drive synergies…
‰ Our past interactions with the managements of ACC-Ambuja indicate that while
they continue to operate as two entities, there are areas (supply chain,
procurement, IT etc.) where the two have already been working together.
‰ Despite potential for significant savings, there has not been much integration in the
areas of logistics (freight due to market overlap), marketing, human resource etc.
‰ E.g. through cross branding/packing, a plant which is closer to the target market
could manufacture both brands which could drive significant freight cost savings.
… and would create largest cement entity in India…
‰ The potential merger of ACC-Ambuja could create the largest cement company in
India with a 57mt of total capacity (expanded).
‰ The merged entity would also become the largest cement company in terms of
market cap of over US$9bn based on current stock prices.
‰ The merged entity would also have strong balance sheet position (as is the case for
both ACC-Ambuja) with net cash of over US$1bn (based on Dec-10 results).
… feedbacks indicate that it may take at least 5-6 quarters more
‰ Our interactions with cement industry participants indicate that unlike UltraTechGrasim consolidation, there are issues which need to be addressed the final merger.
‰ Human resource is a key area where the two companies need to work on,
particularly because, there would be duplication of roles currently across functions.
‰ Considering India is predominantly a retail market, branding plays an important
role. Given both have strong brands, the decision to migrate to a uniform brand
may not be that easy and there has not been any visible work on this front so far.
‰ In this context, it is useful to note that Aditya Birla group worked on operational
integration much before the final merger (in 2010). For example, Grasim-UltraTech
moved to common brand, ‘UltraTech Cement’ in 2007 itself.
‰ Similarly, integration of marketing, supply chain etc. means that the group first
needs to work on operational integration before the final amalgamation.
While we are negative on both, prefer ACC on operation parameters
‰ We are negative on the cement sector due to our concern on demand-supply
imbalance resulting in pricing pressure impacting sector margins.
‰ Based on our interactions, we believe that merger is still 4-6 quarters away.
‰ However, recent stake hike by Holcim would likely provide support to the stock
prices and also signals that Holcim finds current valuations reasonable (closer to
replacement costs).
‰ While we have negative recs on both the stocks, we would prefer to play ACC over
Ambuja on operating parameters like better volume growth potential
(commissioning of new capacities leading to market share gains), higher proportion
of domestic coal, operating leverage benefits (coming in from new capacities).
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