Our top story this week is about a complex restructuring scheme that could put minority shareholders at a disadvantage. I‘m talking the Ambuja scheme!
Our top story this week is about a complex restructuring scheme that could put minority shareholders at a disadvantage. I’m talking the Ambuja scheme!
Earlier this week Ambuja announced a restructuring of parent Holcim’s stake in two Indian cement businesses Ambuja and ACC. Holcim India owns a 9.7% stake in Ambuja and 50% of ACC. Ambuja will first buy 24% of holding company Holcim India for Rs 3500 crore in cash. Then Holcim India will be merged with Ambuja. As consideration for the merger, Ambuja will issue 58.4 crore shares to Holcim’s Mauritius holding company. In effect, Ambuja is paying Rs 14600 crores for Holcim India – Rs 3500 crore in cash & Rs 11,100 crore in stock. And it’s getting 50% of ACC worth Rs 11,500 crores at current market price and 9.7% of its own stock worth Rs 3000 crore at current market price.
THE AMBUJA SCHEME!
Holderind Mauritius & Holcim India
Ambuja Cements: 50.5% ACC: 50.3%
THE AMBUJA SCHEME!
Ambuja: 9.7% ACC: 50%
Ambuja to buy 24% of Holcim India for Rs 3500 cr
Holcim India to be merged with Ambuja
Ambuja to issue 58.4 cr shares to Holcim Mauritius
THE AMBUJA SCHEME!
Ambuja Gives: Rs 14,600 cr
Cash: Rs 3500 cr
Stock: Rs 11,100 cr
Ambuja Gets: Rs 14,500 cr
50% ACC = Rs 11,500 cr
9.7% Ambuja = Rs 3000 cr
ACC becomes a 50% subsidiary of Ambuja and that Ambuja says will help unlock Rs 900 crore per annum in synergies for the next 2-3 years.
if you buy the synergy argument then you may think that Ambuja got ACC at a more than fair price- at market price, no control premium. But the more important question is why is Ambuja buying back its own shares? And does this restructuring benefit parent Holcim more than it does Ambuja’s minority shareholders. To discuss that I have with me Raksha Kothari of DSK Legal and Vivek Gupta, M&A Partner at BMR Advisors.
Doshi: Since we are trying to understand what is the intent of this restructuring, let me first ask you this- in your experience do companies often use the subsidiarisation route to be able to effectively unlock synergies?
Kothari: Normally companies do mergers for synergies but it is not a totally unheard of situation. Companies do use a subsidiary route to synergise their businesses.
Gupta: At the outset, we got to realise the transaction has two objectives. One- the transaction is of course to unlock synergies and ACC and Ambuja being one of the largest cement businesses in the country, their coming together will perhaps unlock synergies as the management says. The second objective of the transaction and it is stated so in the way that I read the press release is the fact that they want to buy the shares of Holcim India for cash.
Doshi: That is how you look at it; that is not how Ambuja looks at it. Ambuja says we want to unlock synergies. Hence this was the best route that we could adopt- the most practicable and viable route which is to buy 24 percent of Holcim India and then merge the rest of Holcim India into Ambuja and use a mix of cash and stock to compensate for the assets that Holcim India holds. They are at no point saying that part of the objective of this restructuring is so that we can monetize the 9.7 percent stake that Holcim India owns in Ambuja and hence repatriate that cash back to the parent. They are not saying that at all. In fact they think we are getting into a flap about that 9.7 percent. So I am going to ask you both this question- was there anyway to do this subsidiarisation synergy unlocking transaction without Ambuja having to buy back 9.7 percent of its own stake?
Kothari: One of the ways could have been that Ambuja buys 50 percent shares of ACC through the parent Holcim and obviously because of that ACC becomes a subsidiary. However the takeover code could be triggered- I have not really looked at it but there could be a situation which would not really help the situation. So that is not practical.
The second would be the merger of both the entities if that was possible. Obviously the two entities lose their brands, market share, etc.
Doshi: You can keep different brands in a merged entity. You can keep different distribution networks in a merged entity but the management says a merger was not on the table right now because it takes up too much management time, we are not in favor of it but this could be a beginning step towards a merger.
Kothari: Yes it could be.
Doshi: So that is the defence for the second step. Third option? Is there any scope at all for Holcim India to have demerged just that 50 percent stake that it owns in ACC to Ambuja India?
Kothari: No a demerger of just shares is not possible; you need an asset or a business technically which is an independent sort of business.
Gupta: I think the basic thing that we got to realise when we analyse this transaction is that this transaction is what it is and it does achieve two objectives. It has faced criticism for this first for-cash related party transaction but the way I look at it is if Ambuja now follows the right process of law in terms of seeking approvals from its minority shareholders in the correct way, in the way the law would normally require them to take that approval, then that is a transaction the shareholders will bless and that is a transaction that Ambuja should go for.
So for example if I were Ambuja, the way I look at this transaction is it has two elements. The first element is it is a related party transaction and therefore this scheme creates two different classes of shareholders. One class of shareholders which is the parent company which has an interest in the scheme which is distinct from the interest of the other Ambuja shareholders. The second class of shareholders is the public shareholders of Ambuja. So the way I would go to a court or the way I would go to SEBI or any regulator is to say that I will seek approval in the form of two separate meetings because it is has two different classes of shareholders. And when I do those two separate meetings and if I achieve 75 percent majority vote in my favour in both those meetings, then I am done.
Doshi: You have gotten ahead of my question. I am not asking what the legal process will be; I am just saying this purchase of 9.7 percent and forgive me for being stuck on that but this purchase of 9.7 percent according to you is a stated objective. According to the company it is not and according to me this is a selective buyback, which in some sense isn't fair to minority shareholders because what Holcim could have earned through dividends over the years from Ambuja, they have sucked out in one go in a tax efficient way.
Gupta: First of all I don't directly see this as a selective buyback on 9.67 percent.
Doshi: Capital reduction, is that more acceptable?
Gupta: 24 percent of ACC value is slightly different from 9.67 percent of Ambuja value. Therefore to that extent the cash going out is Rs 3,500 crore. 9.67 percent of Ambuja is probably Rs 2,800 crore or something. So I do not see that direct correlation. What we got to realize is the tax efficiency is also because if you hold through Mauritius, you satisfy the Mauritius test, tax efficiency could result, can the officer question this; I don’t know.
Doshi: I think he will because the rules have been tightened when it comes to buyback and the scrutiny is a lot more now.
Gupta: So the tax officer could say substantially this transaction is one as a result of combining both steps which happened through a single scheme that the net result of this is that some form of buyback has happened. Therefore, some form of buyback of taxation should arise. I don't know. I am not sort of going into that question.
Doshi: Is this unfair to minority shareholders; that is all I am asking.
Gupta: Minority shareholders will be given the opportunity to cast their votes on this matter. There are certain advantages to minority shareholders…(Interrupted)
Doshi: If you were a minority shareholder, how would you view this Rs 3,500 crore in cash that is going to the parent? Would you view it as unfair?
Gupta: What I would need to do is I would need to analyse…(Interrupted)
Doshi: You are sitting on the fence. If you were a minority shareholder, would you look at this 9.7 percent repurchase suspiciously?
Kothari: Yes because I have not yet been able to understand the reason for the initial 24 percent purchase.
Doshi: So why is there a cash outgo? Why not merge all of Holcim India into Ambuja using stock?
Gupta: I have a more fundamental issue with the scheme though, which issue is not so much from the perspective of an Ambuja minority shareholder but which is more from the perspective of ACC shareholder. I think I can still get my arms around the fact that cash is being paid preferentially to my parent company and I would see whether it is fair value, whether ACC is good value etc. The most fundamental problem that I have as an ACC shareholder is up until now, Holcim was a company, which had 50 percent shareholding in Ambuja and 50 percent shareholding in ACC- both of which are cement assets. Now you are creating a structure where Holcim has 60 percent shareholding in Ambuja and an effective 30 percent in ACC. India is a growing economy, there will be a lot of growth in expansion in the core sectors not withstanding what the cement sector is going through today. So does the fact that now I have differential shareholdings in two companies and the balance is public in both companies, does that cause the Holcim management, which will be the management taking all the calls in terms of expansion, their decision-making to be conflicted or change in any way. That is a fundamental question that I will be asking as an ACC shareholder.
Doshi: Comment here, not necessarily just to comment on what Vivek Gupta is raising because what he is saying about ACC shareholders is fair but do you see minority shareholders voting in favor of this? I know it is an unfair question to ask but I am still saying from a perception point of view? All Ambuja shareholders benefit from Ambuja's acquisition of ACC; the parent benefits a little more by getting to take home roughly Rs 3,500 crore of which about Rs 3,000 crore could be apportioned towards that 9.7 percent stake. So the parent benefits little more than all other shareholders.
Kothari: So basically the minority shareholders will have to consider whether the synergies are good or whether they have lost out on some dividend from Rs 3,500 crore, which was a cash lying in the company. That is something which they will have to analyze, come to a conclusion and vote.
Doshi: I suppose that is what it will come down to, are the synergies worth this restructuring and the loss of cash for Ambuja? It will be interesting to see how minority shareholders vote on this scheme; that is in the several weeks to come.