The deal stuck by Gujarat Ambuja Cements Limited (GACL) with the Tatas to buy the latter’s 14.4 stake in Associated Cement Companies Limited (ACC) was widely appreciated on announcement. The subsequent erosion in market capitalisation of the two companies however reflected a changed in perception of investors.
One of the key factors that adversely affected the share price of GACL was the fear that it would need to raise approximately Rs 10 bn to fund the entire deal. This would have created pressures on margins as servicing costs rose. Moreover, GACL had paid RS 370 per share for the stake as against the ruling price of Rs 270. The ACC stock too took a knock. This was largely due to the apprehension that integrating the operations would be a tougher task. Then came the news that GACL may not have to make an open offer after all. News about Lafarge considering a counter bid too proved unfounded.
There is however much to gain from this deal. The combined entity would have significant clout in domestic markets. This would impart it with more pricing power, which could help in improving realisations. Moreover, synergies in supply chain and procurement could be exploited to minimise costs. For GACL, the deal would enable it to become a significant player with a national presence. ACC on the other hand could leverage on GACL’s efficient processes to improve its own productivity and efficiency levels. In short, there is much to be gained from this deal.
The markets however seem unsure of the benefits. The recent announcement that GACL has picked up a further 4% stake from the Tata group may probably fail to trigger any movement in stock prices.
In recent weeks speculation that the monsoon may not be normal has once again cast a shadow on cement stocks. Until the prospects for the sector, which only until a month ago looked very bright, improve it is unlikely that there will be a significant movement in these stocks. The deal notwithstanding.
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