• MARCH 22, 2000

Guj Ambuja ropes in AIG, Singapore govt. for funds

The Gujarat Ambuja (GACL) and Associated Cement Companies (ACC) takeover saga has taken yet another turn with the company contemplating a move to divest an 80% stake in Ambuja Cement India, which is a holding company for its recent investments. GACL has denied an earlier report that it was planning to offload the stake in ACC to a holding company floated by its managing director.

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 newspaper report has stated that the two investors are AIG and an investment arm of the Singapore government. Both the companies are expected to pick up a 40% stake each in Ambuja Cement. The move, as stated earlier, is aimed at raising funds for the acquisition of the 7.2% stake in ACC that is owned by the Tata group. Also, in case Sebi rules that the company needs to make an open offer for another 20% stake in ACC, GACL would be better prepared to fund it, as it has cash rich investors.

Stepping aside from the issue of takeover or even funding requirements, one needs to take a look (once again) at the aim of the acquisition. GACL, by acquiring the 14.4% stake owned by the Tata group in ACC, will become a key player in the domestic markets with a capacity in excess of 18 million tonnes. Importantly, the GACL will convert itself from a regional to a national player in the cement market (assuming it ultimately leads to a merger). While the first of these factors would ensure that the company’s pricing power would increase dramatically (in areas in which either of the two or both companies are present), the latter would provide a natural hedge in a market that is highly regionalised.

In the long term the two companies make a perfect match. While ACC is inefficient and cash starved, Gujarat Ambuja is considered to be one of the most efficient producers of cement in Asia. On the other hand, ACC’s size outdoes that of GACL by a factor of atleast 1.5 times. Both companies stand to benefit from the other and this is what makes the acquisition logical.

Although an open offer at Rs 370 per share (market price Rs 130 per share) seems steep and overvalued, in the long run the acquisition would go a long way in improving the competitiveness of both the companies. Also, in view of the intensifying competition from multinational companies (so far only Lafarge), the getting together of these two companies seems logical.

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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