Swiss cement major Holcim, in a bid to further consolidates its holding in Ambuja Cement (ACL), has bought an additional 60 million shares (or 3.94% of the currently equity capital) from erstwhile promoters Sekhsaria and Neotia. The deal has been concluded at Rs 154 per share of ACL. Subsequently Holcim Mauritius ismaking and open offer for further acquiring 20% at the price Rs 154 per share. Thedeal values ACL at whopping USD 268 for its CY2007 capacity, 17.2X its CY2007earnings and 10.1X its CY2007 EBIDTA. We believe the price offered is very attractive and at significant premium to its fair value. We believe such a huge premium is being paid by Holcim, primarily because of strategic value and notmuch because of future profitability. If we assume that because of sheer future profitability of ACL Holcim is paying such a huge premium, it implies that cement prices in next 1-2 years should be more than Rs 320. Considering that cement industry is about to add significant 70 million tonne in next 2 years, such expectation looks unreasonable.
Holcim consolidates its holding in Ambuja cements – makes open offer @Rs154
Swiss cement major Holcim, in a bid to further consolidate its holding in Ambuja CementLtd (ACL), has bought an additional 60 million shares (or 3.94% of the currently equitycapital) from erstwhile promoters Sekhsaria and Neotia. The deal has been concludedat Rs 154 per share of ACL. Subsequent to the deal and taking into consideration SEBI takeover code, Holcim Mauritius is making an open offer for further acquiring 306.5million equity share of ACL (representing 20% of the equity capital) at the price Rs 154per share. Assuming 100% success of the open offer, Holcim stake in ACL would go upto 56%.
Is there an arbitrage opportunity?
At CMP of Rs 133 and acceptance ratio of 30%, the arbitrage opportunity (considering 0.7% impact cost and no opportunity cost) presents a return of 4%. However if LIC and GIC do not offer their cumulative stake of 12% in ACL the acceptance ratio jumps to 39%, which means an arbitrage return of more than 6%.
Deal values ACL at a whopping EV/ton of USD 268 for CY2007 capacity
The deal between Holcim and the erstwhile promoters values ACL at whopping USD 268 for its CY2007 capacity, 17.2X its CY2007 earnings and 10.1X its CY2007 EBIDTA. We believe the price offered is very attractive and at significant premium to its fair value. We believe such a huge premium is being paid by Holcim, primarily because of strategic value and not much because of future profitability. If we assume that because of sheer future profitability of ACL Holcim is paying such a huge premium, it implies that cement prices in next 1-2 years should be more than Rs 320. Considering that cement industry is about to add significant 70 million tonne in next 2 years, such expectation looks unreasonable.
What signal is this open offer sending?
We believe Holcim taking erstwhile promoters stake and the subsequent open offer for 0further 20% stake in ACL @ Rs154 per share is most probably culmination of the long drawn process of consolidation of Holcim stake in the company. We do not think this act of Holcim's sends its aggressive or bullish view of the Indian Cement industry. Hence we do not believe that this open offers necessarily an event, which is likely to result in re rating of valuation of cement stocks.
What does it mean for ACC?
Holcim interest in Indian cement industry is driven by the stake it has in two Industry giants i.e. Ambuja Cement (36% stake) and ACC (43% stake – assuming Holcim 100%stake in ACIL). Holcim has already accelerated the process of consolidating its stake in ACL through buying stakes of erstwhile promoters, creeping acquisition as well as there cent open offer. While if we look at ACC, it already holds 43% and hence we believe, Holcim will continue to increase its stake in ACC through creeping acquisition from market rather than make an open offer. Also at CMP of Rs 975, ACC trades at EV/tonUSD 179 and EV/EBIDTA of 9.2X, which is lower valuation as compared to what Holcimis ready to pay for ACC.
We believe current valuation for ACL are expensive keeping in mind significant capacity additions of 70 million tonnes lined up by the industry over next two year. The capacity addition we believe would disturb the demand supply equation and would weaken pricing power of cement producers. However because of an buoyant cement demand in FY2008and high cement prices, cement stocks like Ambuja cement are likely to do well in the short term.
Holcim consolidates its holding in Ambuja cements – makes open offer @Rs154
Swiss cement major Holcim, in a bid to further consolidate its holding in Ambuja CementLtd (ACL), has bought an additional 60 million shares (or 3.94% of the currently equitycapital) from erstwhile promoters Sekhsaria and Neotia. The deal has been concludedat Rs 154 per share of ACL. Subsequent to the deal and taking into consideration SEBI takeover code, Holcim Mauritius is making an open offer for further acquiring 306.5million equity share of ACL (representing 20% of the equity capital) at the price Rs 154per share. Assuming 100% success of the open offer, Holcim stake in ACL would go upto 56%.
Is there an arbitrage opportunity?
At CMP of Rs 133 and acceptance ratio of 30%, the arbitrage opportunity (considering 0.7% impact cost and no opportunity cost) presents a return of 4%. However if LIC and GIC do not offer their cumulative stake of 12% in ACL the acceptance ratio jumps to 39%, which means an arbitrage return of more than 6%.
Deal values ACL at a whopping EV/ton of USD 268 for CY2007 capacity
The deal between Holcim and the erstwhile promoters values ACL at whopping USD 268 for its CY2007 capacity, 17.2X its CY2007 earnings and 10.1X its CY2007 EBIDTA. We believe the price offered is very attractive and at significant premium to its fair value. We believe such a huge premium is being paid by Holcim, primarily because of strategic value and not much because of future profitability. If we assume that because of sheer future profitability of ACL Holcim is paying such a huge premium, it implies that cement prices in next 1-2 years should be more than Rs 320. Considering that cement industry is about to add significant 70 million tonne in next 2 years, such expectation looks unreasonable.
What signal is this open offer sending?
We believe Holcim taking erstwhile promoters stake and the subsequent open offer for 0further 20% stake in ACL @ Rs154 per share is most probably culmination of the long drawn process of consolidation of Holcim stake in the company. We do not think this act of Holcim's sends its aggressive or bullish view of the Indian Cement industry. Hence we do not believe that this open offers necessarily an event, which is likely to result in re rating of valuation of cement stocks.
What does it mean for ACC?
Holcim interest in Indian cement industry is driven by the stake it has in two Industry giants i.e. Ambuja Cement (36% stake) and ACC (43% stake – assuming Holcim 100%stake in ACIL). Holcim has already accelerated the process of consolidating its stake in ACL through buying stakes of erstwhile promoters, creeping acquisition as well as there cent open offer. While if we look at ACC, it already holds 43% and hence we believe, Holcim will continue to increase its stake in ACC through creeping acquisition from market rather than make an open offer. Also at CMP of Rs 975, ACC trades at EV/tonUSD 179 and EV/EBIDTA of 9.2X, which is lower valuation as compared to what Holcimis ready to pay for ACC.
We believe current valuation for ACL are expensive keeping in mind significant capacity additions of 70 million tonnes lined up by the industry over next two year. The capacity addition we believe would disturb the demand supply equation and would weaken pricing power of cement producers. However because of an buoyant cement demand in FY2008and high cement prices, cement stocks like Ambuja cement are likely to do well in the short term.
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