The acquisition of Holcim’s India operations, which has Ambuja Cement and ACC, throws up many opportunities for the Adani group, the acquirer. One of it relates to the possible merger of the two companies, a move that analysts think is quite likely.
Together, the two companies have an installed capacity of around 70 million tonnes per annum (mtpa) against the total domestic capacity of 500 mtpa. Though, the combine is the second largest after UltraTech at 120 mtpa, there are niggling issues. One critical moment goes back to 2014, when Holcim and Lafarge announced their global merger. Soon after that, Ambuja and ACC said they were “evaluating a potential merger.” By mid-2018, that plan was dropped with the reason being, “there were certain constraints in implementing the merger.”
The first big attempt to unlocking synergies followed when the two companies when they signed a master supply agreement (MSA), with the intention of reducing operational costs, which including using each other’s plants and eventually achieving economies of scale. This decision was on the back of market share for both dropping between FY14 and FY19 attributed to being slow on organic and inorganic growth. With a new owner, that decision is likely to be looked afresh.
Santosh Meena, head of research, Swastika Investmart, thinks a merger is the logical way forward. “There are significant benefits since synergies will arise. It may take time but at some point, it will happen,” he says. Besides from the Competition Commission of India perspective, according to him, it makes sense for Ambuja and ACC to be looked as one entity. “It makes strategic sense and there are a lot of areas on reducing costs and improving margins that can be easily addressed.”
Obviously, a lot more needs to be done. Meena takes that point forward and points out that both Ambuja and ACC have been losing market share to UltraTech and Shree Cement.
“Maybe, the Adani group with a presence in logistics and power can make a difference,” he says. This is where the ports piece is strategic it can move cement from the west to east cutting through the south. Besides, their road construction business and the ability to use the railways will help in cutting logistics costs. The acquisition of Ambuja and ACC, says Meena, will bring to the table two strong brands as well. “That is important since it can be built on.”
Kranthi Bathini, equity strategist at WealthMills Securities, says the first step is the acquisition of Ambuja and ACC to be then followed by the merger. “There is synergy when one looks at pricing. It will increase their bargaining power with consumers and the trade too,” he thinks. This is not to forget that the valuation too could be enhanced. “If a merger is being considered, it will be a market-led decision with a favourable impact on market capitalisation.”
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