holcim-ambuja-acc unlocking synergies. really?
TRANSCRIPT
Introduction
Should Holcim be paid Rs 35 bn given its stewardship of Ambuja and ACC?
What does IiAS recommend?
How should minority shareholders vote?
What are the other issues with this restructuring?
Do the synergies really exist?
2
Introduction
Should Holcim be paid Rs 35 bn given its stewardship of Ambuja and ACC?
What does IiAS recommend?
How should minority shareholders vote?
What are the other issues with this restructuring?
Do the synergies really exist?
3
Post transaction structure
Holcim
Ambuja
ACC
61.39%
50.01%
0.29%
Proposed restructuring of Holcim’s India Operations
• Should Holcim be paid Rs 35 bn given its stewardship of Ambuja and ACC?
• To answer this, we have assessed the performance of ACC and Ambuja under Holcim
• Do the “Synergies” really exist?
• To answer this, we have assessed the possible benefits to Ambuja shareholders from this
restructuring
Just two questions
Existing structure
Holcim
Holcim India
Ambuja
100%
40.79%
9.76% ACC
0.29%
50.01%
4
Money for nothing and the cash for free
• Holcim receives Rs 35.0 bn as cash
• Holcim increases its shareholding in Ambuja from 50.5% to 61.39%
• Minority investors get diluted by 21%
• Holcim continues to vote on 50.3% of ACC (0.29% directly and on 50.01% through Ambuja)
How IiAS sees this
5
Introduction
Should Holcim be paid Rs 35 bn given its stewardship of Ambuja and ACC?
What does IiAS recommend?
How should minority shareholders vote?
What are the other issues with this restructuring?
Do the synergies really exist?
6
Ambuja and ACC under Holcim
Operational performance
Financial performance
Corporate governance record
7
Under Holcim: ACC and Ambuja have added very little capacity
• Total capacity added in the industry between FY08 and FY12 was around 127 MT
• Ambuja and ACC added only 13.8 MT. Their combined share of industry’s total capacity
declined from 21.2% to 17.3%.
• Moreover, 5.7 MT added at Ambuja was entirely grinding capacity: no clinkering capacity
was added
Capacity addition between 2008 and 2012
5.7
8.1
4.5
26.3
6.7
21.2
0 5 10 15 20 25 30
Ambuja
ACC
Madras Cement
Jaypee Cement
Shree Cement
Ultratech
Capacity added in MT (FY08-FY12)
5.7 MT added by Ambuja was entirely grinding capacity. No clinkering capacity added
8
Under Holcim: Capex plans of Ambuja have been delayed
2007 2008 2009 2010 2011 2012 2013
Project 1: Clinker expansion of 2.2 MT each at Bhatapara and Rauri
Project 2: Grinding expansion of 5.5 MT at Dadri, Nalagarh, Ahmedabad, Barh
Project 3: Grinding expansion of 2 MT at Bhatapara and Maratha
Project 4: Clinker addition of 2.2 MT at Nagaur, Marwar Mundwa expansion of 4.5 MT
Company had to purchase 0.725 MT of clinker in 2008,
reducing EBITDA margin by 200 bps.
Company had to purchase 1.7 MT of clinker in 2009,
reducing EBITDA Margin by a further 400 bps.
Impact of delays
Projects at Ahmedabad and Barh abandoned.
Costs escalate from Rs. 1.6 bn per MT to Rs.
3.6 bn per MT at a time of weak economic
growth.
Estimated timeline for completion. (Commencement of construction in case of project 4 )
Delays
9
Ambuja and ACC under Holcim
Operational performance
Financial performance
Corporate governance record
10
Pre-Holcim: ACC and Ambuja were industry leaders
Ambuja and ACC were top performers
Ambuja’s sales growth was the highest among
peers
ACC’s EBIDTA growth was the highest among
peers
ACC’s PAT growth of 57% was highest followed
by Ambuja’s 39%
Before Holcim: Summary
15%
26%
14%
8%
19%
ACC Ambuja MadrasCements
ShreeCement
Ultratech
Sales – 6 YR CAGR 31% 25%
4%
18% 23%
ACC Ambuja MadrasCements
ShreeCement
Ultratech
EBIDTA – 6 YR CAGR
11
Data for six year period: 2001-2006 Ultratech data for 3 Years ending 2006
57% 39%
12%
-7%
143%
ACC Ambuja MadrasCement
ShreeCements
UltratechCement
PAT – 6 YR CAGR
Under Holcim : ACC and Ambuja are laggards
Ambuja and ACC are lagging their peers
Sales growth for Ambuja and ACC is lower than
that of their peers
Peers have delivered much higher EBIDTA and
PAT growth
Under Holcim: Summary
12% 15%
21%
42%
33%
ACC Ambuja MadrasCements
ShreeCement
Ultratech
Sales – 7 YR CAGR
2% 8%
28%
42% 41%
ACC Ambuja MadrasCements
ShreeCement
Ultratech
EBIDTA – 7 YR CAGR
-2%
4%
30%
80%
48%
ACC Ambuja MadrasCements
ShreeCement
Ultratech
PAT – 7 YR CAGR
12 Data for seven year period: 2006-2012
Profitability eroded at Ambuja and ACC ; improved at peers
EBIDTA margins and PAT margins have improved across the industry between 2006 and
2012, except at ACC and Ambuja; margins almost halved at ACC and Ambuja saw a 29% and
42% decline in EBIDTA margin and PAT margin respectively
Profitability
13
30% 34%
18%
28%
16% 17%
24% 27% 28%
22%
ACC Ambuja Madras Cement Shree Cements Ultratech
EBITDA Margin (2006 vs 2012)
2006
2012
19% 21%
7%
2%
6% 8%
12% 11%
9% 12%
ACC Ambuja Madras Cement Shree Cements Ultratech Cement
PAT Margin (2006 vs 2012)
2006
2012
Under Holcim: Share price of Ambuja and ACC underperformed peers
786%
356%
216% 164% 151%
Shree Cements Ultra Tech Madras Cements ACC Ambuja
Share price returns - 7 YR period under Holcim
ACC and Ambuja have underperformed their peers under Holcim’s management
Ultratech and Shree Cement Stocks have widely outperformed Ambuja and ACC
Share price performance Summary
EV/tonne ($) 2006 2012 Shree Cements 216 145 Ultratech Cement 53 140
Madras Cement 19 85 ACC 118 103
Ambuja 171 138
14
Under Holcim: Ambuja has accumulated cash, only to transfer it entirely to Holcim?
9.5 8.8
16.5
29
38.6
CY08 CY09 CY10 CY11 CY12
Cash Balance at Ambuja (Rs bn)
• While cash balance has quadrupled from Rs
9.5 bn to Rs 38.6 bn, dividend per share has
grown only by ~63%
• Lower dividend in absolute amount
The company has accumulated cash only to
transfer it to Holcim
Ambuja: Between FY08 and FY12
2.20 2.40 2.60 3.20
3.60
CY08 CY09 CY10 CY11 CY12
Dividend per share (Rs)
24% 30% 31%
40% 43%
CY08 CY09 CY10 CY11 CY12
Dividend Payout Ratio
15
Ambuja and ACC under Holcim
Operational performance
Financial performance
Corporate governance record
16
Increase in royalty not reflected in sales, margin growth of the companies
• Below-par sales growth
• PAT margins halved at ACC, decreased by
14% at Ambuja between 2009 and 2012
• Royalty has doubled at both ACC and
Ambuja.
Summary
Increase in Royalty to Holcim does not reflect growth in ACC and Ambuja’s performance
Conclusion
18% 16%
8%
12%
ACC Ambuja
PAT Margins
2009
2012
333 325
705 645
ACC Ambuja
Royalty (in Rs. mn)
2009
2012
12% 12% 9%
30%
42%
ACC Ambuja MadrasCement
ShreeCements
UltratechCement
Sales growth: 4 YR CAGR
18
Holcim missed the message that shareholders gave while voting on the royalty resolution
11%
89%
ACC
FOR
AGAINST
17%
83%
Ambuja
FOR
AGAINST
• More than 80% of minority shareholders voted AGAINST the proposal, in both ACC and Ambuja
• Resolution would have been defeated under the new SEBI rules that require a majority of minority shareholders
(i.e. more than 50% of non-promoter investors)
• Both companies have paid royalties in the region of 0.7% of net sales.
• In February 2013, Ambuja and ACC passed resolutions to approve payment of royalty to Holcim, up to 1% of
net sales.
Proposal to hike royalty
Voting pattern among minority shareholders on the proposal to increase royalty
Observations
ACC’s board is not in compliance with the spirit of clause 49….
Sr. No Name of director Occupation Tenure (Yrs) Executive
1 Kuldip Kaura Managing Director, ACC 3 Non-Executive Non-Independent
2 Paul Hugentobler Executive Director, Holcim 8 3 Bernard Fontana CEO, Holcim 1
4 ML Narula Former MD, ACC 6
5 Aidan Lynam Regional Manager, Holcim 3
6 NS Sekhsaria [a] Chairman, ACC 14 7 SM Palia [a] Former Director, IDBI Bank 11 8 Shailesh Haribhakti [a] Chartered Accountant 7
Non-Executive Independent 9 FK Kavarana Director, Tata Sons Ltd <1
10 Sushil Kumar Roongta MD, Vedanta Aluminium 2 11 Ashwin Dani Former MD, Asian Paints 2
[a] They are independent as per company. IiAS does not consider them as independent on account of extended tenure (NS Sekhsaria and SM Palia) and conflict of interest (Shailesh Haribhakti). Only 27% of the board members are independent.
IiAS Classification Company Classification
19
9%
36% 55%
Executive
Non-independent
Independent
9%
64%
27%
…..neither is the board of Ambuja Cements
IiAS Classification Company Classification
20
18%
27% 55%
Executive
Non-independent
Independent
16%
67%
17%
Sr. No Name of director Occupation Tenure (Yrs) Executive
1 Ajay Kapur CEO, Ambuja <1
2 Onne Van Der Weijde (Promoter Director) MD, Ambuja 4
Non-Executive Non-Independent 3 Paul Hugentobler (Promoter Director) Vice Chairman, Ambuja 7
4 Bernard Fontana (Promoter Director) CEO, Holcim 1
5 BL Taparia Fmr whole-time director, Ambuja 11
6 NS Sekhsaria [a] Chairman, Ambuja 31
7 Nasser Munjee [a] Advisor & Consultant 12
8 Rajendra Chitale [a] Managing Partner, Chitale & Associates 11
9 Shailesh Haribhakti [a] Chartered Accountant 7
Non-Executive Independent 10 Dr. Omkar Goswami Founder & Chairman, CERG Advisory Pvt.Ltd 7
11 Haigreve Khaitan Partner, Khaitan & Co. <1
[a] They are independent as per company. IiAS does not consider them as independent on account of their extended tenure on the board and conflict of interest (in case of Shailesh Haribhakti). Only 17% of the board members are independent
Conflict of interest – Shailesh Haribhakti in ACC
ACC DB Desai & Co
(audit firm)
Shailesh Haribhakti,
Owner, Haribhakti & Co
Chairman, Audit
Committee, ACC
Strategic Partner, DB Desai & Co
• In April 2013, Haribhakti & Co announced a merger
with DB Desai & Co
• ”We planned it in 2000, waited for more than a
decade for the merger to happen” – S. Haribhakti
Role 2: Strategic Partnership, DB Desai & Co
• Has the authority to appoint
tax auditors and fix their
remuneration
Role 1: Chairman, Audit Committee
21
ACC shareholders lost because of this conflict of interest
ACC DB Desai & Co (audit firm)
Shailesh Haribhakti,
Owner, Haribhakti & Co
A staggering sum of Rs. 220 mn paid for tax audit in FY12
• Shailesh Haribhakti approves
the choice of DB Desai as tax
auditor of ACC, and fixed
their remuneration
Actions
• A staggering sum of Rs. 220 mn paid to DB Desai for tax audit.
• 200x higher than tax audit fees at peer cement cos.
• 1.5% of PAT
• The conflict of interest is not only bad governance, it has a
substantially negative impact on profitability.
Impact
Shailesh Haribhakti continues to serve as independent director and chairman of the audit committee at ACC.
22
Introduction
Should Holcim be paid Rs 35 bn given its stewardship of Ambuja and ACC?
What does IiAS recommend?
How should minority shareholders vote?
What are the other issues with this restructuring?
Do the synergies really exist?
23
Questioning the synergies
No cash balance: other income falls by Rs 3.5 bn
(10% of Rs. 35.0 bn)
Borrow Rs. 30 bn to buy ACC stake: incur interest
costs of Rs 3.6 bn (borrowing at 12%)
This will offset the gain from dividend income of Rs
2.8 bn from ACC (50.3% of Rs. 5.6 bn dividend paid
by ACC in 2012).
33% drop in net profit
Merger is not accretive Easy Picking have already been taken
• Ambuja and ACC operating under same mgmt since 2000 when Ambuja bought into ACC
• Central Procurement Unit and Technical Support Services - to aid Ambuja and ACC already exist
• Most of the promised synergies (clinker swaps, procurement savings) are already being achieved
• Mere capital restructuring cannot result in Rs 9.0 bn of savings • Setting up committees cannot result in Rs 9.0 bn of savings
Total income = Rs 114 bn
Net profit = Rs
13 bn
Dividend income = Rs 2.8 bn
Interest expense = Rs 3.6 bn
Loss of treasury income = Rs 3.5 bn
+ = -
- Net profit (Proforma) =
Rs 8.7 bn
(down 33%)
24
Introduction
Should Holcim be paid Rs 35 bn given its stewardship of Ambuja and ACC?
What does IiAS recommend?
How should minority shareholders vote?
What are the other issues with this restructuring?
Do the synergies really exist?
25
Are Ambuja’s plan to invest Rs. 30 bn in ACC compliant with RBI requirements?
• Was Ambuja planning to use internal accruals or borrowings? • This route has been disallowed by RBI since 4 July 2013 • Has Holcim taken into consideration the new RBI requirements while making the
announcement? • To attain compliance with RBI requirements, Ambuja will have to issue shares to Holcim
• This amounts to Holcim using Ambuja’s cash for increasing its stake in Ambuja and ACC
Holcim
(Foreign Entity)
Ambuja
(Operating Indian Company)
ACC
to buy 10% in ACC for Rs 30 bn
• Ambuja, being an operating company, cannot use internal accruals for downstream investments in ACC.
• Cannot use funds borrowed in domestic market
• Ambuja will have to bring funds from Holcim for downstream investments
RBI Circular excerpt(4 July 2013): “Downstream investments through internal accruals are permissible by an Indian company engaged only in activity of investing in the capital of another Indian company/ies .”
26
Structured in Two part transaction to move out cash
27
• Acquisition of 24% stake of Holcim India for Rs 35 bn Step I
• Issue 584 mn shares to Holcim Step II
Scenario: Transaction will be placed for shareholders’ approval directly at Step II
Entire cash of Rs 35 bn will have been transferred to Holcim from Ambuja’s books without shareholders approval. This is within legal limits.
Minority shareholders will have no option but to vote FOR the resolution on issue of shares (Step II) since the entire cash, has already been transferred to Holcim.
Though the MD of Ambuja has verbally confirmed that approval for the transaction will be for both steps simultaneously, the shareholders should seek confirmation from the company.
Shareholder approval is non-mandatory
Shareholder approval is mandatory
Consequences of the merger
Commitments to buy another Rs. 30 bn in ACC shares will lead to lower dividend payouts
Holcim may use the Rs. 35 bn cash to increase its stake in Ambuja This amounts to using
the company’s cash (as opposed to own funds) to make creeping acquisitions
Holcim will continue to charge royalty to ACC, even after ACC becomes a subsidiary of Ambuja
Depletion of Rs. 35 bn in cash
Investments will have to be funded by debt – i.e. from a positive cash company, Ambuja will become a debt-holding company
Royalty Cash depletion
Creeping acquisitions
Dividend and investments
Dilution Minority shareholders in Ambuja face dilution of 21%
Consequences of the merger
28
Introduction
Should Holcim be paid Rs 35 bn given its stewardship of Ambuja and ACC?
What does IiAS recommend?
How should minority shareholders vote?
What are the other issues with this restructuring?
Do the synergies really exist?
29
Recommended Structure
Only a full merger will benefit minority shareholders. Our recommendation is for ACC and Ambuja to merge
Existing structure
Holcim
Holcim India
Ambuja
100%
40.79%
9.76% ACC
0.29%
50.01%
Post transaction structure
Holcim
Ambuja
~ 50.3%
ACC
Cash remains on Ambuja balance sheet
Cement produced at Ambuja plant could be sold under the ACC
brand and vice versa.
Both brands ACC and Ambuja can co-exists –
One premium brand (Ambuja)
One mass market brand (ACC)
Full merger Synergies Impact
Transaction will be fair and beneficial
to all shareholders and not just
Holcim.
Transaction will be compliant with
RBI requirements
30
Introduction
Should Holcim be paid Rs 35 bn given its stewardship of Ambuja and ACC?
What does IiAS recommend?
How should minority shareholders vote?
What are the other issues with this restructuring?
Do the synergies really exist?
31
Issuance of Ambuja
shares for swap
• Special Resolution under section 81(A) of Companies Act • Issuance of shares to Holcim India to facilitate the merger • Requires approval of 75% of all shareholders (Holcim owns 50.5%)
IIAS Recommendation: Vote AGAINST
Institutional shareholders can use the following occasions to have a say on the transaction.
Scheme of arrangement
• Scheme of arrangement under section 391 – 394 of Companies Act • Dissolution of Holcim India and merger into Ambuja in exchange for equity
shares of Ambuja • Requires approval of majority of non-promoter shareholders.
IIAS Recommendation: Vote AGAINST
Subsequent Increase of
stake in ACC
• Ambuja may have to breach their investment limit (Section 293 1 (c) or Section 372 A • Approval for additional investments – Rs. 30 bn for investing in equity of ACC • Requires shareholder approval by special resolution.
IIAS Recommendation: Vote AGAINST
Opportunities to vote
32
IiAS: Related research
33
Holcim-Ambuja Restructuring Ambuja Postal Ballot ACC Postal Ballot Missing the message Royalty payments and minority investors
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