Stock markets were delighted. Corporate India responded with surprise. Analysts were dismayed. French cement major Lafarge was shocked. All these feelings were generated by the deal of the year. Gujarat Ambuja Cements Limited (GACL) (capacity 7 million tonnes) had entered into an agreement with the Tata Group to purchase a 7.2% stake in cement major Associated Cement Companies (ACC) (capacity 11.6 million tonnes) at a cost of Rs 370 per share.
The ACC stock had been trading at Rs 240 per share prior to the announcement. The Tata Group`s holding in ACC prior to the sale was pegged at 14.4%. The Group has retained the option to sell the remaining 7.2% stake to GACL. Needless to say, shareholders of both the companies greeted the deal with enthusiasm.
The stock markets drove up the stock prices of the two companies due to the synergies and the possible gains in efficiency at ACC. Corporate India`s surprise was rooted in the fact that GACL had beaten French cement major Lafarge in picking up the stake. The analysts, however, were cautious in view of the high price having been paid by GACL.
ACC is one of India`s leading cement producers. The company belongs to a select group of cement companies that have a national presence. This is essential in view of the large variation in demand and price in various markets across India. Despite its large size and national presence, ACC has been one of the worst affected by the recent slowdown in the India economy. A comparison of EBITDA margins (earnings before interest, tax, depreciation and amortisations expressed as a percentage of sales) of select companies clearly underscores this fact.
The reasons for ACC`s substandard margins are not far to seek. Low employee productivity, relatively small size of plants and lack of spending on upgrading technology (5% of its turnover is contributed by plants using the outdated wet process) has crippled the company`s productivity.
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In light of its poor track record in terms of efficiency of operations, the GACL deal should come as a welcome relief for the cement giant. ACC will get a strategic investor in GACL that is reputed for the efficiency of its operations. The company would benefit from the managerial and technical inputs it receives from its new `investor`. The scope for improvement in operational efficiencies is tremendous and this is borne out by the large difference in EBITDA margins.
Not that ACC has yet to respond to its dismal performance. It has earlier initiated measures to reduce costs by rationalising work force and hiving off its power plants into a separate company. The company has recently launched a four pronged strategy to improve efficiency. These include -
Identifying the unviable manufacturing units
Selling off the wet process cement manufacturing units
Adding fresh capacity to the viable plants
Hiving off the research and consultancy directorate (a research centre on cement).
ACC had unveiled this strategy only a few days before the deal between the Tata Group and GACL took place. In light of this development the strategy could face modifications or be dropped altogether. Nevertheless, ACC`s management seems to have realised that operational efficiency is as essential as size in order to dominate the sector. This change of attitude on the part of the management would definitely benefit the company.
The ACC-GACL-Tata deal has the potential to create India`s largest and most efficient cement company - one with a nationwide presence.
The biggest hurdle to the deal, however, would be the cultural differences that exist between the two companies. GACL is generally known as a more aggressive and proactive player as compared to the reactionary nature of ACC.
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