ACC benefits, Ambuja loses out, Holcim is the clear winner :Credit Suisse

● Holcim has announced restructuring of its ownership structure in
ACC and Ambuja, and in our view, Holcim, is the clear winner.
ACC minority shareholders benefit at the margin, while the
reorganisation is negative for Ambuja’s minority shareholders.
● Holcim pockets US$600 mn cash in the transaction which helps it
reduce leverage and maintain its investment grade rating. Holcim
also benefits from merger synergies (management forecast of
US$150 mn vs. CS's forecast of US$75 mn annually).
● Ambuja’s minorities are impacted by: (1) Holcim restricting use of
Ambuja’s existing cash to buy ACC; (2) committing future cash
flows to buy 10% of ACC over two years; and (3) the market may
apply a holding company discount to ACC’s stake which more
than offsets merger synergies.
● ACC minorities benefit from: (1) merger synergies; (2) a creeping
acquisition by Ambuja for a 10% stake in ACC could support ACC
prices; and (3) Holcim’s direct stake of 50% in ACC reduced to an
indirect stake of 30% . However, given high leverage at Holcim,
the overhang on existing cash of ACC will remain (US$600 mn
plus).

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Holcim announced the restructuring of its ownership structure in ACC
and Ambuja. We evaluate the impact of this on: (1) Holcim; (2)
minority shareholders of Ambuja and (3) minority shareholders of ACC.
Figure 1: Holcim benefits, Ambuja loses out, ACC marginal benefit
Positives Negatives
Holcim 1. US$600 mn cash (with low tax
outgo)
2. Merger sy nergies
3. Low er impact of rupee
depreciation w ith cash reduction at
India B/S.
1. Holding company discount on
Ambuja’s stake in ACC
Ambuja
minorities
1.Merger sy nergies
2.Efficient capital structure now
1. Cash usage restricted to buying
out ACC’s stake
2.Future cash flow s committed for
10% ACC buy-outinstead of
capacity expansion
3.Holding company discount could
be used for ACC stake
ACC
minorities
1.Merger sy nergies
2.Creeping acquisition by Ambuja to
support price
3.Holcim’s stake reduced from 50%
direct to 31%indirect
1.Ov erhang on existing cash of
US$600 mn increases.
Source: Company data, Credit Suisse estimates
Holcim is the clear winner as cash helps to reduce debt
Holcim pockets US$600 mn cash through the transaction whereas in
the old structure, Holcim was entitled to only 50% of Ambuja cash.
The cash helps Holcim to reduce its net debt and maintain its
investment grade rating (essential to keeping interest rates low).
Additionally, merger synergies (management forecast of US$150 mn
vs. CS's forecast of US$75 mn) also benefit Holcim.
Ambuja minority shareholders impacted the most
Holcim has restricted minority shareholders' choice by using Ambuja’s
cash for ACC’s stake. The cash could have been used alternatively for
a buy-back. Additionally, Ambuja has committed to acquire an
additional 10% stake in ACC over 24 months. In our view, this will
convert Ambuja into a net debt company and from a Holcim
perspective it will be an idle structure as ACC + Ambuja will be neutral
on cash on a consolidated basis and shield Holcim from further rupee
depreciation. The new structure results in 28% equity dilution and
without merger synergies will be EPS dilutive to the extent of 7% .
Ambuja’s management forecast of merger synergies is 2x CS's
estimate. Based on CS's estimate of merger synergies (US$75 mn
annually), the transaction is EPS neutral for Ambuja shareholders and
should be 12% accretive if management’s synergies estimates of
US$150 mn are realised. Crucially, if Ambuja gets a holding company
discount for ACC’s stake then even post realisation of management
synergies, the transaction negatively impacts minority shareholders.
ACC minority shareholders receive a better deal
ACC minority shareholders benefit from: (1) Merger synergies; (2) the
creeping acquisition by Ambuja for a 10% stake in ACC over the next
two years, which should support ACC prices; and (3) Holcim’s direct
stake of 50% in ACC reduced to an indirect stake of 30% . However,
post today’s transaction, investors will have low comfort on cash at
ACC of US$600 mn plus. Overall, in our view, ACC minority
shareholders do benefit at the margin in the transaction.
Transaction to take 12 months; Open offer not triggered
The transaction is expected to take ~10-12 months to complete. The
transaction does not need CCI approval, but does need approval from
the FIPB. Ambuja does not need to make an open offer to ACC
shareholders, as there is no change in control (Holcim stays the
ultimate holding company). The transaction will be a one-step
transaction, with money going out only after all approvals are obtained.