Holcim deal won't be a negative for cement sector, affirms Jefferies India

Brokerage firm Jefferies India expects that the Holcim deal will not be a negative for the cement sector, though there will be few takers for the stakes.

Jefferies was in stark contrast with JP Morgan, which had last week said that the deal would be a major loss for the entire cement sector.

According to Bloomberg and The Economic Times news reports, Holcim plans to sell its stake in Ambuja and held preliminary talks with JSW Group, Adani Group and Shree Cement.

"Ambuja/ACC are leading brands, having large capacities and ROEs much superior to most large companies recently sold at EV/T of $100-150. While deal valuations will be keenly watched, for a probable expensive M&A, risk of an 'aggressive' buyer disrupting the industry appears low," Jefferies report said.

ACC’s current capacity stands at 34MT and it is currently working on multiple projects. Ambuja’s current capacity stands at 31.5MT and recently 7MT of expansion was announced. Analysts say the combined capacity stands at 66MT and ongoing projects would take capacity to 78MT.

Jefferies expect that at the current market price, the stake buy (including open offer) would imply a total cash outgo of $10 billion, which would boil down the number of interested buyers to a few. It also expects that till the deal concludes (if at all), the capex execution timelines or other efficiency projects could take a backseat.

JP Morgan had last week reported that the complete buyout in Ambuja Cement of Holcim’s stake (63.1 percent) would cost the buyer Rs 46,200 crore with a mandatory open offer (26 percent) in both ACC and Ambuja would cost another Rs 29,800 crore, taking total cost to Rs 78,000 crore. After a successful open offer, the new buyer’s stake would stand at 89 percent in Ambuja and 81 percent in ACC and it would have to be seen if the buyer comes down to 75 percent or de-lists the companies.

JP Morgan also expected any new deep-pocket player’s entry through a potential buyout of Holcim’s stake in Ambuja Cement (and indirectly ACC) would be negative for the Indian cement industry as capacity expansion could accelerate.

"At the current valuations for Ambuja, the cash outgo for the buyer would be startlingly high, given this doesn't appear like a share swap deal. This would also make the deal one of the largest buyouts ever in the cement space globally. That would boil down the number of interested Industrial groups to a few, who may also rope in outside capital/private equity to fund the acquisition. The debt to equity mix for the purchase would be keenly watched," the Jefferies report said.

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