Ambuja Cements, ACC mega merger remains un-cemented

The Ambuja Cements-ACC merger, which has been on the cards since 2013, has been put on hold citing 'current constraints'.

Almost a year ago, the cement majors appointed a special committee of board of directors to start exploring a mega merger, in a move then seen as LafargeHolcim’s attempt to unify its Indian businesses. The Swiss building materials maker holds over 63.6% in Ambuja Cements, which in turn holds 54.5% of ACC.

While there are multiple views on the possible 'current constraints', Credit Suisse has flagged off—cannibalisation on the ground. "The problem is existence of two strong brands, and in several markets the two brands compete each other," says Credit Suisse in a new report. "Therefore, a mechanism to ensure that one brand does not benefit at the expense of another was needed and would have been taken through a full merger," Credit Suisse says.

Ambuja Cements already has a majority stake in ACC but despite that synergies could not be realised without a full merger, Credit Suisse adds. While both the companies want to be merged eventually, for now, they have a plan to maximise synergies through mutual purchase of materials and services.

In 2013, Ambuja had projected annual savings of Rs 900 crore a year when it was building a case for the merger, says Credit Suisse. Out of that less than half of the synergies were to come from the material swaps. "The development is weaker than the market expected," Credit Suisse says.

The Ambuja-ACC plan has left analysts unimpressed as they were expecting a full merger. Prateek Kumar and Nishant Shah, analysts with Mumbai-based Antique Stock Broking, foresee the outlook on fructification of these synergies to be hazy. Citing 2013, Kumar and Shah said that the Ambuja management had indicated they were targeting unlocking of $150 million of synergies then, of which $ 60-70 million was via supply chain optimisation through clinker and cement swaps.

The rest $70-80 million of savings were targeted via fix costs, shared services and common procurement by Ambuja Cements and ACC. "Managements have communicated in the past that some part of common procurement based synergies have been realized already," the duo says.

Analysts are also expecting both the entities to lose market share owing to limited capacity addition in the medium term, relative to their peers like Ultratech and Shree Cement. Credit Suisse has a more cautious stance on the sector as a whole; “Cement stocks are already factoring in next three years of upcycle whereas the upcycle is yet to start,” Credit Suisse warns. “The demand growth is weak currently and players are finding it difficult to pass on cost increase,” the brokerage says.

Meanwhile, the ‘merger on hold’ announcement which came after market hours on Monday, has dented share prices of both Ambuja Cements and ACC on the BSE. At the day’s lowest price of Rs 1,623, ACC was down 2.42% compared to the previous day’s close of Rs 1,663.3 a share. While, Ambuja Cement took harder hit, as its day’s low of Rs 250.1 was 4.65% lower than the previous day’s close price of Rs 262.3.