Gujarat Ambuja Cements Limited (GACL) is to acquire a 7.2% stake in Associated Cement Companies (ACC) at a cost of Rs 370 per share. The stake is being bought from the Tatas, promoters of ACC, with an option of buying an additional 7.2% stake from the latter.
ACC is India's second largest cement company with a capacity of 11.6 m tonnes per annum. The company commands an 11.5% stake in the Indian cement market.
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 deal comes as a surprise as it was recently reported in leading newspaper that Lafarge was in talks with the Tata Group for a possible buyout of the latter's stake in ACC (14.4%). The move is likely to come as a rude shock to Lafarge, which coincidentally lost out purchasing a controlling stake in DLF Cements to GACL earlier this month.
GACL's aggressive attitude is in line with its ambitions of becoming India's leading cement manufacturer. The company capacity is currently in excess of 6 million tonnes and it is in the process of significantly expanding its capacity. With the strategic stake in ACC, the company will become the largest manufacturer of cement in the country.
ACC, on the other hand, is one of India's largest producers of cement. However, the company is considered to be relatively inefficient on account of the small sizes of its plants, bloated work force and the reactive nature of its management. Added to this, ACC has been a laggard when it comes to adopting new technologies in order to improve productivity and efficiency.
The two companies make interesting partners. While GACL is considered to be the epitome of efficiency and productivity, the same cannot be said for ACC. Added to this is the aggressive nature of GACL's attitude, which is in sharp contrast to the reactive nature of ACC's. Despite these drawbacks, the acquisition seems logical.
On GACL's part, it would immediately become a leading national player, as against regional, in the cement sector while at the same time further delaying Lafarge's back door entry into the national arena (it owns two cement plants acquired from Tata Steel). Having a national presence would provide the company with a natural hedge in terms of internal business cycles. Additionally, the company is gaining effective control of ACC by acquiring just 14.4% stake.
ACC on its part would benefit from adopting GACL's practices in order to improve efficiency. The company has recently announced a restructuring plan to improve the efficiency of its plant. With GACL in the saddle, it is likely that the plan (which may be modified) will be implemented with a sense of urgency. This would result in a significant improvement in bottomline.
GACL would need to shell out approximately Rs 4.55 bn for acquiring the 7.2% stake. The company would have to resort to a debt component to finance the purchase, as its cash flows would be insufficient to finance both the acquisition and the expansion that it is pursuing. This could temporarily put a downward pressure on the company's bottomline.
A key issue will be whether or not a merger (or acquisition) is planned for the future. With a 14.2% stake a takeover battle could as yet be launched in the markets. This could upset GACL's ambitions.