Ambuja Cement has received minority shareholder approval (68.5% of those who voted) to buy Holcims 50.01% stake in ACC for Rs 11,800 crore. The deal would involve a Rs 3,500 crore cash payout (25% stake of Holcim India) and issuance of 43.3 crore shares (28% dilution) to Holcim (merger of Holcim India into Ambuja), resulting in Holcim owning 61.4% of Ambuja. The transaction is subject to approvals of the high court and others.
Considering a Rs 3,500 crore cash drain, 28% equity dilution and 20% holdco discount to ACC stake, we see a 10% reduction in the stock price to ~R154.
EV/ tonne of Rs 7,435 (US$120) and 10x CY14 EV/ Ebitda after consolidation of ACC's 50% stake and 28% equity dilution appear expensive. We have not changed our target price as we await the final clearance of the deal. However, the eventuality implies a target price of Rs 146 (15% downside from CMP) as we value Ambuja at a target multiple of 9x CY14E Ebitda and ACC's stake at 20% holdco discount.
Synergy benefits would accrue only in CY15E. The deal would have no immediate impact on earnings or valuations as postrestructuring synergy benefits would accrue only in CY15E.
We believe synergy benefits would be back-ended as deal closure is expected only by Q2/ Q3CY14. Meanwhile, demand recovery would remain muted, at sub-6% growth in FY14E due to a slowdown in the infra and industrial segments.