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Ambuja Cements
Merger – ahead of time?
Event
Merger could be near term: It’s been widely reported that ACEM and ACC
are likely to merge given the same promoter “Holcim”. Recent stock
purchases by Holcim into both these stocks have further fuelled the debate
about the timing of the merger. We believe that the potential tightening of
competition regulation can force this decision to be made near term (before
June ’11). We don’t think both companies are ready for a merger as yet;
hence, the synergy benefits may not flow through soon enough. We
recommend investors to book profits on euphoria in both these names.
Impact
Merger – rationale is there: Holcim owns around 48% each in both ACEM
and ACC. Both companies are in the cement business with more or less
similar boards; hence, having two companies wouldn’t be advantageous. The
big question is which entity gets merged into whom. Our guess is that ACC
may get merged into ACEM, given that ACC has an MD who is on a short
assignment.
Merger – why now: Government of India has introduced merger control
provisions under the Competition Act, 2002, with effect from 1 June 2011. The
Competition Commission of India (CCI) has circulated a draft proposal, which
is very comprehensive and may require detailed scrutiny. ACC and ACEM
combined have more than 25% market share in 9 states; we think getting the
merger approval from CCI will be tough. But, is management ready?
Synergy benefits – nothing in the near term: The key benefit of the merger
in our view is optimisation of logistics costs and cross branding. While Holcim
has already merged the ‘technical services’, ‘purchase’ and ‘IT’ departments
of both ACC and ACEM, we believe a merger of the ‘marketing’ departments
is key. Operations at both ACC and ACEM are divided into three overlapping
zones. We note it will require a lot of organisational restructuring to mix these
teams. We calculate around Rs50-60/t of cost savings eventually.
Merger ratio – on our estimates, not much to choose: Based on our
replacement and earnings analysis, we believe that the merger ratio should
be around 1 ACC share for 7.7 shares of ACEM. So, on the current share
price of ACEM at Rs147, ACC should trade slightly higher at Rs1,132.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs115.00 based on a DCF methodology.
Catalyst: Merger with ACC before 1 June 11
Action and recommendation
Selling into the rally: While it is difficult to ascertain the exact date of
announcement, we think that no benefits will flow in for the next 2 years. We
don’t recommend owning these names at 19-20x PER & US$140-160 of EV/t.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ambuja Cements
Merger – ahead of time?
Event
Merger could be near term: It’s been widely reported that ACEM and ACC
are likely to merge given the same promoter “Holcim”. Recent stock
purchases by Holcim into both these stocks have further fuelled the debate
about the timing of the merger. We believe that the potential tightening of
competition regulation can force this decision to be made near term (before
June ’11). We don’t think both companies are ready for a merger as yet;
hence, the synergy benefits may not flow through soon enough. We
recommend investors to book profits on euphoria in both these names.
Impact
Merger – rationale is there: Holcim owns around 48% each in both ACEM
and ACC. Both companies are in the cement business with more or less
similar boards; hence, having two companies wouldn’t be advantageous. The
big question is which entity gets merged into whom. Our guess is that ACC
may get merged into ACEM, given that ACC has an MD who is on a short
assignment.
Merger – why now: Government of India has introduced merger control
provisions under the Competition Act, 2002, with effect from 1 June 2011. The
Competition Commission of India (CCI) has circulated a draft proposal, which
is very comprehensive and may require detailed scrutiny. ACC and ACEM
combined have more than 25% market share in 9 states; we think getting the
merger approval from CCI will be tough. But, is management ready?
Synergy benefits – nothing in the near term: The key benefit of the merger
in our view is optimisation of logistics costs and cross branding. While Holcim
has already merged the ‘technical services’, ‘purchase’ and ‘IT’ departments
of both ACC and ACEM, we believe a merger of the ‘marketing’ departments
is key. Operations at both ACC and ACEM are divided into three overlapping
zones. We note it will require a lot of organisational restructuring to mix these
teams. We calculate around Rs50-60/t of cost savings eventually.
Merger ratio – on our estimates, not much to choose: Based on our
replacement and earnings analysis, we believe that the merger ratio should
be around 1 ACC share for 7.7 shares of ACEM. So, on the current share
price of ACEM at Rs147, ACC should trade slightly higher at Rs1,132.
Earnings and target price revision
No change.
Price catalyst
12-month price target: Rs115.00 based on a DCF methodology.
Catalyst: Merger with ACC before 1 June 11
Action and recommendation
Selling into the rally: While it is difficult to ascertain the exact date of
announcement, we think that no benefits will flow in for the next 2 years. We
don’t recommend owning these names at 19-20x PER & US$140-160 of EV/t.
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