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Why Gautam Adani's Acquisition of Holcim's Indian Cement Assets Makes Strategic Sense

Why Gautam Adani's Acquisition of Holcim's Indian Cement Assets Makes Strategic Sense

Gautam Adani-led Adani Group's acquisition of Holcim's cement businesses in India catapults it to the No. 2 spot. Here's why it makes strategic sense

If there is one word that can describe the strategic moves of India’s cement industry in recent times, it is this: consolidation. And Gautam Adani is at the heart of it. If there is one word that can describe the strategic moves of India’s cement industry in recent times, it is this: consolidation. And Gautam Adani is at the heart of it.

If there is one word that can describe the strategic moves of India’s cement industry in recent times, it is this: consolidation. The latest instance of this strategy has seen Swiss cement major Holcim exit India, and the Adani Group, which had no presence in the space earlier, become the second-largest cement maker in the country overnight. The exit of Holcim has substantially altered the form and dynamics of the cement industry in India. After being around for close to two decades, the international major thought it wise to instead focus on markets where the opportunity in solutions and products was more attractive. In that scenario, India figured low in the pecking order, with Holcim already calling it quits in Brazil, Northern Ireland, Sri Lanka, Malaysia and Russia.

In a $10.5-billion deal, the Adani Group picked up two well-known companies—Ambuja Cement and ACC—that Holcim owned. These are strong brands across geographies and together, they are a formidable force covering the Indian landscape. These two brands together have an installed capacity of 70 million tonnes per annum (mtpa). That, however, is quite a distance behind UltraTech, which has an installed capacity of 120 mtpa, and is the largest cement maker in the country. If Holcim had a tight leash on quality, it did very little either in expanding capacity or acquiring any of the companies that came on the block through the Insolvency and Bankruptcy Code. The competition was quick to move and smartly augmented capacities to establish a stronger presence in their traditional markets, apart from entering those with potential, such as eastern India. This could explain why Holcim did not find the India market attractive enough to stay on.

From a strategic point of view, there is a lot that Ambuja and ACC bring to the table. This point has not been missed by Gautam Adani, Chairman of the Adani Group. In fact, the acquisition ties in very well with his other businesses. For example, he is big in the ports business, constructs roads, and like any other cement player, will have access to rakes. Then again, he has a power transmission business, which throws up fly ash, a raw material in cement manufacturing. Plus, the fact that he can source coal from his mines business in Australia allows him to manage costs at two key levels—logistics and power. With his foray into renewable energy—which is known to have a long gestation period—the acquisition opens up one more way to knock off costs and set him up well for the decarbonisation story. Since he has no presence in cement, the deal is unlikely to face any hurdles from competition watchdog, the Competition Commission of India.

The transaction sees the Adani Group routing the acquisition through a Mauritius-based entity, which will acquire Holcim’s 63.11 per cent stake in Ambuja Cement and 4.48 per cent in ACC, apart from the 50.5 per cent indirect holding in ACC. Vishal Periwal, Cement and Construction Analyst at IDBI Capital Markets, says the transaction values Ambuja at an enterprise value per tonne (a standard metric used in the cement industry) of $178, while it is $127 for ACC. Compared to earlier transactions in the space (see table), it is not cheap but needs to be viewed from the point that it gives the buyer an immediate and strong foothold. “With the acquisition, Adani gets reach across all the five regions (central included) in India, with the north and east contributing 50 per cent of its capacity,” explains Periwal. The value of the deal assumes that the mandatory 25 per cent open offer goes through completely. Of the $10.5 billion, around $6.5 billion goes to Holcim, which the Swiss company will use to acquire assets in other markets. Responding to a query from Business Today on a media call, the company’s global CEO, Jen Jensich, hinted that the company had been conservative in India. “We could possibly have done more in India but in our opinion, we had a good strategy,” he said.

The race to acquire Holcim’s businesses in India came with the usual twists and turns. JSW—the other contender, with its existing cement business and a play in steel and paints—expected that the acquisition would be synergistic. Investment bankers point out that there were two other global steel majors in the fray; the strategic rationale was that the slag that the steel makers generate is used in manufacturing cement. The Adani Group, however, managed to fend off competition and acquire the India businesses of Holcim, thereby catapulting itself to the No. 2 spot on the pecking order of cement manufacturers in the country. To Periwal, consolidation has been the buzzword in the Indian cement industry and “this transaction further strengthens that”. According to him, Holcim had been less aggressive in capacity additions and “now with a new promoter, it could change the outlook for ACC and Ambuja”.

Holcim’s sell-off marks the exit of a large overseas player, leading one to believe that India is a terrain they are not too comfortable with. The space is dominated by the home-grown companies, which continue to look for ways to increase capacity and capture a generous slice of the infrastructure pie. With the government’s infrastructure push, things will only get more interesting from this point for cement makers.

 

@krishnagopalan