Ambuja attempts to skirt open offer for ACC - Views on News from Equitymaster

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Ambuja attempts to skirt open offer for ACC

Mar 23, 2000

Gujarat Ambuja Cements Limited has sold a 40% stake in Ambuja Cement India (ACI), a subsidiary, to foreign institutional investors for a consideration of Rs 3.7 bn. The move is aimed at skirting the possibility of having to make an open offer for Associated Cement Companies (ACC). Read interview with Mr TMM Nambiar, MD, ACC 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.

Under the new structure, the companys holding in ACC and Ambuja Cement Eastern (a 1.5 million tonne cement plant) will be transferred to ACI. ACI has also drawn up plans to set up two cement plants of 2 million tonnes each at a cost of Rs 6 bn. ACI plans to go public, after which GACLs holding in the company will stand diluted at 42%.

The sole purpose of the move is to prove to Sebi that GACL has not taken over the management of ACC. If the Sebi were to hold this view, GACL would have to make an open offer for an additional 20% stake in ACC at a price of Rs 370 per share (market price is currently Rs 130 per share). The 20% stake would cost the company Rs 12 bn.

A key benefit for GACL from this move would be a decline in the level of debt that it had initially taken to acquire the AC stake. Even if the Sebi were to rule that an open offer needs to be made, the entire burden would fall on ACI, thus insulating GACL from the possibility of a hike in debt burden. Therefore, GACL could continue to cooperate of pricing issues in various markets even as the fear of launching a takeover is diluted.

Market View:
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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