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Adani’s Nuvoco buy-out unlikely to pass CCI muster

Media reports had speculated that the conglomerate was planning to buy Nirma’s company

May 31, 2022 / 02:57 PM IST
The Jefferies report said that the cement sector is likely to see more consolidation, especially with the entry of Adani Group (Photo by Rodolfo Quirós/Pexels)

The Jefferies report said that the cement sector is likely to see more consolidation, especially with the entry of Adani Group (Photo by Rodolfo Quirós/Pexels)

Adani Group may not be able to swing the buy-out of Nirma group’s Nuvoco if the Competition Commission of India (CCI) were to strictly go by the threshold for clearing M&A transactions.

The latest report from Jefferies on consolidation in the cement sector in India said that Adani may find it difficult to get the CCI nod for the Nuvoco buy based on the metric used by the competition watchdog to pass or disallow M&A transactions.

 There were news reports that Adani Group may be looking for a new acquisition after buying out Holcim’s stake in ACC and Ambuja Cement. The next target was speculated to be Nuvoco.

Also read: No tax on $6.38 billion transaction with Adani Group: Holcim

The number that matters

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When clearing acquisitions, CCI considers the Herfindahl Hirschman Index (HHI). The index is a measure of market concentration, and it is applied to see the extent to which a merger and acquisition (M&A) will increase concentration and weaken competition. According to Jefferies, “any M&A resulting in HHI exceeding 2000 may face hurdles from the CCI”, and combining Ambuja-ACC with Nuvoco brings the index close to uncomfortable levels. 

“HHI for Eastern region for FY23 would move to 1945 from 1498, if we combine Ambuja/ACC with Nuvoco. It is a close number to Holcim Lafarge combination estimate where CCI felt it would be appropriate for Lafarge to divest,” said the report. In 2014, when Holcim and Lafarge announced their global merger, the competition watchdog in India had asked the combine to divest some of the assets in the country. In 2016, CCI approved the divestment by LafargeHolcim (now Holcim Ltd) of its assets in Lafarge India. 

Currently, the players in Eastern region, in descending order of their market share, are Dalmia (18 percent), Nuvoco (17 percent) Ultratech (15 percent); ACC+Ambuja (15 percent); Shree Cement (12 percent); Star Cement (5 percent); JSW Cement (3 percent); JK Lakshmi (3 percent) and Ramco (3 percent). The rest of the players have a combined 9 percent. If ACC+Ambuja combines with Nuvoco, the combined market share will be 42 percent. According to Jeffries, any single player crossing 44 percent or two players crossing 31 percent each or three players crossing 26 percent each and so on will result in HHI crossing 2000. 

Also read: In an inflationary environment, FM says cartelisation going to be a challenge

Consolidation in the sector

The Jefferies report said that the sector is likely to see more consolidation, especially with the entry of Adani Group. “The cement industry has constantly been through M&As, with larger players targeting smaller ones. Even some larger players have succumbed to acquisition in the past. Through M&A, buyers have added ready-made capacity, scale, faster access to markets, and reserves. The consolidation trend is likely to continue as larger players are likely to remain aggressive,” it said. 

“We believe that in the medium to long term, the cement industry will continue to see M&A driving capacity consolidation due to issues related to overcapacity, volatile demand, debt servicing, etc. Ready assets should continue to fetch good valuations, depending on regional exposure and the strategic importance of the acquired assets for the buyer and visibility on reserves,” it added.

The key hurdle to this trend would be the CCI clearance, said the report. 

It added that the approval for M&As would be easiest for the south and difficult for the central region because HHI for FY22 for south/east/north/west/central regions are 584/1433/1564/1737/1780.
Asha Menon
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