Ambuja Cements is in the news for its supposed restructuring what it calls heading towards a more efficient capital structure. The company is entering into a share purchase-and-swap transaction with its majority shareholders resulting in merger of Holcim India Private Ltd. into Ambuja Cements.
As per the details of the scheme, Ambuja will purchase 24% of shares of Holcim for a cash consideration of Rs. 35 b; it will cancel 9.76% of its own shares held by Holcim; it will issue 584.44 m of its shares to Holderind Investments Ltd.; and by virtue of the scheme it will own 50.01% of ACC.
The current shareholding of Ambuja is: Holderind (40.79%), Holcim (9.76%), minority (49.45%). Ambuja also has certain options, warrants and rights which are exercisable for the purpose of the scheme. Since Holcim is fully owned by Holderind, it gets 50.55% of Ambuja. Holcim also owns 50.01% of ACC. Holderind is part of Holcim, Switzerland.
The story goes forward: Out of Holcim's total of 5,690 m shares, 1,365 m shares are being purchased by Ambuja at a price of Rs.25.63 per share; and in exchange for the balance 4,325 m shares, Ambuja will issue 584.44 m of its own shares to Holderind.
Post merger, Holderind will own 1,214 m shares in Ambuja resulting 61.12% of the fully diluted shareholding because of options, warrants and rights being exercised. The balance 38.88% will be left for the minority shareholders.
The merger scheme required valuation of both Ambuja and ACC separately and as per the valuation made by the professional accountants the share swap is 7.4 and the implied price per share is Rs.189.66 for Ambuja and Rs.1249.02 for ACC.
To evaluate how the scheme impacts both the majority and minority shareholders, let's first have a look at the implied market values: Holcim of Rs.146 b representing its ownership in Ambuja and ACC; Ambuja of Rs.293 b; and ACC of Rs.235 b. The implied valuations are not too far off current market-cap of Ambuja (Rs.275 b) and ACC (Rs.201 b).
For the majority and minority shareholders, it would first appear that the difference in value is heavily tilted in favor of the majority. To see how, all that is to be done is to find out their value before and after the merger.
The market value of Ambuja should go up post transaction from Rs.293 b to Rs.375 b because of the net effect of the cash payout and gain of share in ACC. This increase in value of Rs.82 b is shared by the majority (Rs.81 b) and the minority (Rs.1 b). Now it sounds like the real merger, with the minority defeated.
However, if we look at what happens to Holderind as a firm, the equation would be different. Holdeind will give up about Rs.148 b of its value in Ambuja and Rs.117 b in ACC; in exchange, it will get cash of Rs.35 b and value of about Rs.229 b in the restructured Ambuja. The minority will give up about Rs.145 b and get Rs.146 b after the merger. Consequently, the net effect of the merger scheme is shifting of about Rs.1 b of value from, in fact, Holderind to the minority shareholders. The deal is now through as the required minority has voted.
All this is subject to the valuations being fair which I doubt profoundly.
Finally, this is how the companies have rewarded their shareholders in the past:
This is the problem with the cyclical business.
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