Holcim is in the process of restructuring its Indian arms Ambuja Cements and ACC. It will see Ambuja becoming a flagship company. Holcim plans to increase its stake in Ambuja to 61.3% and Ambuja in turn will buy Holcim’s 50.1% stake in ACC.
However, Kotak Institutional Equities had lowered Ambuja Cements's target price due to its dismal set of numbers. Ambuja Cements Q1 net profit fell 31%. Speaking on the deal's impact on the target price, Murtuza Arsiwalla says, "We haven’t given full effect to that in terms of our fair value just yet."
Speaking to CNBC-TV18, Arsiwalla added that from the restructuring point, transactions are at current market price, except that there will now be a holding company and discounts will probably creep in.
Nishchal Joshipura, head of merger and acquisition, Nishith Desai Associates believes the biggest beneficiary of the deal is Holcim. It stands to gain Rs 3,500 crore free of tax from India because Holcim Mauritius is going to be the seller of shares and as per the India-Mauritius tax treaty there is no tax on capital gains.
The other advantage, going by the current restructuring plan, Ambuja saves on dividend distribution tax. “So clearly, upstreaming of cash is one of the most important objective, it appears, of this restructuring,” says Joshipura.
But the question to be asked, according to Joshipura, is should the Rs 3,500 crore, which has been paid to Holcim by purchase of shares of Holcim India, be factored in the valuation or is this something in addition to what Holcim would have got from the entire scheme of amalgamation.
Below is the verbatim transcript of Murtuza Arsiwalla and Nishchal Joshipura’s interview on CNBC-TV18
Q: Have you changed price targets significantly on both names ACC and Ambuja? And where do you stand now on them?
Arsiwalla: Essentially on Ambuja we have changed our target price, but that is more driven from the earnings which were there as opposed to the proposed restructuring. So, our change in target price is more a function of a poor earnings outlook for the company than to do with the restructuring.
Per se what we believe from a restructuring perspective is that it is the transactions at current market price, largely earnings neutral, but for the fact that there could be a holding company, discount which would probably creep in as you have seen in transactions of similar nature in the past, though we haven’t given full effect to that in terms of our fair value just yet.
Q: Grasim is a clear example of a significant holding company discount. Why should it be any different for Ambuja given how the deal is structured?
Arsiwalla: Grasim is a parallel and a precedent. We haven’t just given the effect to, waiting for essentially the transaction to go through. But the slight difference that I would draw between the Grasim transaction versus what you are seeing in Ambuja and ACC is that Grasim as a standalone entity had a smaller viscose staple fibre (VSF) business and the entire cement business had been transferred to UltraTech, whereas in the current case Ambuja still continues to have a meaningful cement business, which does not get transferred and would not attract a holding company discount and to that extent one could argue that punitive impact of a holding company discount could be lesser. Theoretically speaking there is no basis for a holding company discount. It is just something that we have seen across the board in several companies where such a transaction has taken place.
Q: A lot of investors or minority shareholders of Ambuja are quite unhappy as we can see with the 13 percent fall in the stock, is there a way minority shareholders can protest or block this taking away of cash from the Ambuja balance sheet? Are there any legal precedents to this?
Joshipura: The way I look at it is – there could have been three ways in which this restructuring could have been done. The first one is what the company announced yesterday. The second one which could have been more straightforward would be a simple merger of Holcim India with Ambuja and the third way could have been to merge ACC with Ambuja, but because of reasons of maybe to keep two separate branding for Ambuja and ACC and a heavy stamp duty cost, which could be there if ACC is merged with Ambuja they may have rolled out the third option.
Now coming to the first option which the company announced yesterday – I think clearly there are two issues which need to be discussed one is the selective upstreaming of cash to Holcim to the extent of Rs 3,500 crore, which there are two or three advantages to Holcim on account of that. First is they get this full Rs 3,500 crore free of tax from India because Holcim Mauritius is going to be the seller of shares and as per the India-Mauritius tax treaty there is no tax on capital gains.
The second advantage is that they will be able to selectively get this cash, which in the second option if Holcim India would have been merged with Ambuja and then Ambuja would have distributed dividends to all the shareholders then proportionate to the public shareholding Holcim wouldn’t have got that cash in the form of dividend plus the fact that Ambuja also would have saved dividend distribution tax by going for option one.
So clearly, upstreaming of cash is one of the most important objective, it appears of this restructuring.
Coming to the second point on the valuation, there have been multiple methods which have been provided in the investor presentation, which Ambuja has shared and if you purely go by market capitalisation what I understand is that the market cap of ACC is Rs 23,000 crore, whereas ACC has been valued at Rs 30,000 crore. So, if you take the difference of Rs 23,000 crore and Rs 30,000 crore which is Rs 7,000 crore and 50 percent of that which is Rs 3,500 crore that has been upstreamed to Holcim.
So, the question which arises is and again I am not an expert on valuation, but the question which arises is should this Rs 3,500 crore, which has been paid to Holcim by purchase of shares of Holcim India, should this have been factored in the valuation or is this something in addition to what Holcim would have got from the entire scheme of amalgamation.
Now coming to your question on do the minority shareholders have any rights? There was a circular issued by Securities and Exchange Board of India (Sebi) in February 2013, where Sebi has given some rights including the right to appoint an independent chartered accountant who will also evaluate the valuations done for Holcim India and Ambuja and at the same time there is also a right given to public shareholders that majority of the public shareholders should also clear scheme. So, as long as these things are cleared beyond that courts have time and again held that valuation is not something which the courts will go into and they will leave it to the commercial judgement of the shareholders and the company.
Q: So, even if they can’t contest the entire valuation argument, can they contest just the use of cash on books and this unexplained routing from one entity to the other. What is the money being put towards and why is it not being more equitably either decided or distributed among shareholders?
Joshipura: If you purely look from a corporate governance perspective what the investor presentation mentions is both the transactions are going to close on the same day. So, if the shareholders are challenging the scheme per se on account of let us say valuation and the scheme does not go through then even the first transaction of acquisition of 24 percent shares will also not go through, independent of valuation it would be difficult for the minority shareholders because to a certain extent there are two transactions – the first transaction of 24 percent purchase cannot be clubbed with the second transaction of merger of Holcim India with Ambuja as long as the valuations are fair of Holcim India and Ambuja.
Q: What is your sense of what the end game is because this deal and various facets of it have been moving around since 2006 between Holcim, ACC and Ambuja? Where do you think this is finally headed? Is there some kind of an eventual deslisting plan on the cards? What is it that Holcim is working towards?
Arsiwalla: I think one is if you see it from Holcim’s perspective essentially what the management was clarifying is that having an under-leveraged balance sheet did not work to its advantage and so it is kind of made the capital structure more optimum. Ofcourse, the cash goes back to Holcim routed through the Mauritius entity.
Another thing that the management is giving you a clear indication is and which kind of is getting missed out is that essentially what Holcim has done is increase its economic interest in the erstwhile Ambuja business from 50 percent to 60 percent, whereas it has reduced its economic interest in ACC from 50 percent to 30 percent because now it owns 50 percent out of 60 percent of Ambuja and so an effective interest of 30 percent.
So, there is a clear bias towards Ambuja that I see, but that is something that would play out more in the medium-to-long term and does not again take into consideration the holding company discount that we have been talking about.
Q: But a related point is that Ambuja shareholders today would be right in asking that at a time when generally earnings and cash growth is weak for Ambuja as we saw in the results yesterday, what sense would it make for the company to keep on spending whatever cash it is generating, not for capex, but for further purchase of ACC shares by another 10 percent over the next couple of years?
Arsiwalla: That definitely is a question that remains to be answered given that both the companies have outlined capex plans and what this transaction essentially does is move from a healthy liquid balance sheet that investors have traditionally liked and given rich multiples for to a more leveraged balance sheet because it is not that the cash did not have utilisation based on the management’s own plans in terms of capex and capacity additions. So, there was utilisation of cash that was outlined for the next 2-3 years. But now that cash is gone and the entities will now have to depend more on a leveraged balance sheet to fund those capex plans.