Holcim Revamp Sparks Biggest Plunge in 5 Years at Ambuja

Ambuja Cements Ltd. fell the most in about five years as at least seven brokerages cut ratings for the stock after parent Holcim Ltd. asked the Indian company to pay $593 million to buy its stake in a subsidiary.

The shares plunged 10.6 percent, the sharpest drop since October 2008, to 171 rupees at the close in Mumbai. The stock sank 15 percent intraday, the most in 21 years. Ambuja will buy Holcim’s 50.01 percent stake in ACC Ltd. by paying 35 billion rupees ($593 million) to the world’s biggest cement maker and through a share swap. ACC tumbled 3.54 percent to 1,187 rupees.

Brokerages including Bank of America Corp., Religare Capital Markets cut their recommendation on Ambuja, saying the transaction won’t benefit minority shareholders. The deal means Ambuja will spend 92 percent of the 38 billion rupees it held in cash and short-term investments on March 31, the data show.

“Ambuja Cements will be parting away with its huge cash balance without any earnings per share accretion,” Ajit Motwani, an analyst with Emkay Global Financial Services Ltd., wrote in a report. The deal “dilutes standards of corporate governance that could further impact its valuation.” He pared his recommendation on the stock to reduce from hold.

Elara Securities India and Centrum Broking were other firms that lowered their recommendations for Ambuja.

The company was rated a sell by 24 of 62 analysts tracking the stock, data compiled by Bloomberg show. The consensus rating, or the average of recommendations updated by analysts in the past year, fell to 2.68 today from 3.05 at the start of the month. Five denotes a buy and one a sell.

‘Emotional Reaction’

“We should step over the emotional reaction,” Onne Van Der Weijde, managing director of Ambuja Cements told Bloomberg TV India today. “We are putting the cash to better use by buying a controlling stake in a fantastic, iconic brand. Ambuja will have immediate cashflows after this acquisition is completed, with no execution risk.”

The transaction will have a “synergy potential” of 9 billion rupees over two years after the deal is completed, Ambuja said in a statement yesterday. The benefits will be almost equally shared between ACC and Ambuja, according Der Weijde.

Mumbai-based Ambuja will first acquire a 24 percent stake in Holcim India Pvt. for 35 billion rupees. Holcim India will then be combined with Ambuja. That will enable Ambuja to control Holcim India’s 50.01 percent stake in ACC. Holcim India also owns 9.76 percent of Ambuja. Jona, Switzerland-based Holcim will control 61.39 percent of Ambuja after the merger.

‘Increasing Control’

“This is like having the cake and eating it too,” said Jitendra Nath Gupta, founder of Mumbai-based proxy advisory firm Stakeholders Empowerment Services. “Holcim has effectively increased their control in Ambuja and also received 35 billion rupees in cash.’

Ambuja will spend as much as 30 billion rupees to boost its stake in ACC by 10 percent without triggering an open offer for the remainder of the stock, according to the statement.

‘‘ACC and Ambuja will remain separate brands with their separate management teams,’’ Der Weijde said in a conference call yesterday. ‘‘We have no plans to delist ACC and I want to be very clear about this.’’

A direct merger would have created ‘‘merger costs,’’ Der Weijde told Bloomberg TV India. ‘‘

Holcim paid 21 billion rupees for a 14.8 percent stake in Gujarat Ambuja Cements Ltd. in January 2006. The holding was raised later by 20 percent following an open offer. Holcim bought shares in ACC a year earlier.

Royalty Payment

Bank of America lowered its rating on Ambuja ‘‘despite expected industry-wide earnings improvement,’’ Reena Verma and Amit Rathi, analysts at the brokerage, wrote in a report. ‘‘The upside potential from Ambuja’s earnings per share recovery may be dulled by potential concerns over the treatment of minority shareholders vis-a-vis its controlling shareholder.’’

In February, both ACC and Ambuja agreed to nearly double a royalty payout to Holcim, which reported a 7 percent drop in sales in the three months to March 31, to 1 percent of sales amid protests from smaller shareholders. Ambuja’s shares fell 6 percent that month, the biggest drop since the 30-day period ending April 30, 2012.

About 28.2 percent of Ambuja shareholders and 24.3 percent of ACC investors voted against the proposal which required approval from only half the shareholders. Holcim controls more than 50 percent voting rights in both the cement makers.

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