In an attempt to ward off the possibility of having to make an open offer for an additional 20% stake in Associated Cement Companies (ACC), Gujarat Ambuja (GACL) has decided to sell its 7.2% stake in ACC to a privately held holding company.
GACL is the largest manufacturer of cement in Gujarat and Punjab. It is India's most efficient cement manufacturer due to high degree of mechanisation in its products and mining activities. It has controlled freight costs by moving bulk of its production through the sea route.
The new deal that has been structured to ward off the legal issue of having to make an open offer has been termed as ‘complicated’. The holding company that is buying the stake, has been floated by Narotam Sekhsaria, managing director of Gujarat Ambuja.
Why this deal?
In the absence of this deal, the company would have to make an open offer for ACC that would have cost it Rs 12 bn approximately. Not just that, the stake would have been picked up at a price of Rs 370 per share (the price at which the deal with the Tata group was struck) as compared to the market price of Rs 130. Moreover, this investment would have been over and above the Rs 9 bn that the company has paid (a part of it will be paid in the future) to the Tata group for purchasing the latter’s stake in ACC. The total transaction would have dried the company of its resources.
Where does this leave Gujarat Ambuja?
From the looks of it the deal will be beneficial to Gujarat Ambuja. First of all, the need for making an open offer at an inflated price would be diluted. As a fallout of this, the company would then be able to comfortably fund its acquisition of DLF Cements and any other planned buy out. Secondly, given the ownership structure of the holding company, Gujarat Ambuja would continue to exercise control over ACC. Finally, the need to go ahead with an international offering (which would lead to a dilution of equity) to raise funds for the acquisition will not be there.
The view that Sebi takes towards deal will be crucial as that will determine the success or failure of the company's attempt to ward off the stipulations of having to make an open offer under the takeover code.
The fact that GACL is India's most efficient producer of cement has led the analyst to rate the stock as a 'BUY'. The management quality of the company is considered to be another factor in favour of the company.
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