Adani Buys Ambuja Cement and ACC. What does it mean?

Adani Group has agreed to buy Holcim's India assets in the two publicly listed cement companies - ACC and Ambuja Cements in a $10.5 billion deal. The Swiss cement maker was doing business in India for 17 years and decided to exit the market. It is the largest acquisition for the conglomerate and will make Adani Group the second largest cement player in India. 

For the deal, there were other bidders as well. According to a media report, industrialist Sajjan Jindal-led JSW Group, Aditya Birla Group’s UltraTech Cement Ltd, and Dalmia Bharat were other bidders for Holcim Group’s Indian assets. Adani wins the bid comfortably. What does the deal mean for Adani, Ambuja, and ACC?

Here is everything you need to know about the deal:

Deal Size and Value: The Adani Group will acquire Holcim's assets in India through an offshore special purpose acquisition vehicle at $10.5 billion. It is India's largest-ever M&A transaction in the infrastructure and materials space. Adani group will acquire a 63.19% stake in Ambuja cement and a 54.53% stake in ACC cement.

Adani also made an open offer to acquire a 26% stake in both the companies for another $4.1 Bn.

Adani Group has agreed to buy Ambuja Cements for Rs 385 per share and ACC shares for Rs 2300. Both the prices are at a 4% premium from the date (13 April) when the deal was first reported.

Adani Group Cement market share post the deal: Post the deal, Adani Group will become the second-largest player in the cement sector. The group will be next only to UltraTech Cement which has a capacity of 120 million tonnes per annum (mtpa). By combining Ambuja and ACC, the total production capacity comes at 70.9 mtpa for Adani. ACC has a production capacity of 34.45 mtpa of cement. Ambuja Cements has an installed capacity of 31.45 mtpa, with the retail segment contributing to about 80% of its sales.

Holcim Exit: Holcim, as per the media report, wants to make its revenues green. The company had laid out its Strategy 2025 - Accelerating Green Growth. In line with the strategy, the company has already exited or divested various cement assets in countries such as Northern Ireland, Brazil, Sri Lanka, Malaysia, and Russia.

Was it a costly deal for Adani?

As per experts, it was an expensive deal. The price paid by the Adani group as part of the deal is far greater than what it would cost to put up similar capacities through Greenfield or Brownfield expansion. While greenfield and brownfield projects cost Rs 7,700 per tons and Rs 4,620 per tons, this acquisition has come at Rs 12,782 per tons for Adani.

According to Jefferies reports, Greenfield and brownfield projects need to make an EBITDA/T of Rs 1,500 and Rs 900 respectively to deliver ROE and ROCE of 10.6%. The Adani Group entity will need to make an EBITDA/T of Rs 2,000 to get similar margins – an ROE of 10.8% and a ROCE of 10.7%.

What does the deal mean for Adani?

India is the second-largest cement producer in the world and accounts for 8% of global cement production. The deal means a lot for Adani Group. Phillip Capital said in its report that the deal has the potential to turn around the fortunes of the whole cement industry and not just Adani.

IIFL Securities on ACC and Ambuja

The brokerage firm has recommended BUY and HOLD for both ACC and Ambuja Cements shares. Both cement companies have a good market share in the cement sector. These may rise 20-25% from current levels in the next 2 to 3 months. 

The deal will now have to be approved by the competition regulators and authorities and is expected to close in the second half of 2022.