More commentary on the Holcim deals in India

More commentary on the Holcim deals in India
Published: 02 February 2006

Holcim’s investments in India will be about $1.6bn if the open offer succeeds or a little over $1bn if it fails, which is quite significant for a manufacturing, commodity business like cement. India will account for about 40 per cent of Holcim’s Asia Pacific capacity after the acquisition.

Holcim’s intentions from the beginning were quite clear; the Ambuja Cement Eastern and ACC stake acquisitions were just starters with the main target being GACL. The price paid for GACL is definitely stiff, with an enterprise value per tonne of US$200, making it the most expensive deal in India. But then it gets control over the best-managed cement company with enviable operating profit margins in a country where cement demand is expected to grow at a steady rate.

At what level Holcim ultimately consolidates its stake remains to be seen. Moreover, Gujarat Ambuja had an option to make Holcim buy its remaining 33 per cent stake in Ambuja Cement for Rs 1344 crore, which it is unlikely to exercise now.

The immediate effect of this deal is the raised asking price for other cement companies. This will make it more difficult for consolidation to happen unless bidders hike their prices. But the prospect of being dwarfed in the cement market may prompt some large companies to loosen their purse strings to increase capacities. The deal is unlikely to alter pricing power in the near future in the cement market, since the two parties were having a strategic relationship even earlier.

With 34Mt of cement capacity under its belt, Holcim becomes the largest cement player in India with a dominant position in all markets, except the South.
Even under separate companies, all the companies are likely to operate as one entity to leverage on economies of scale. Whether it maintains three operating companies in India remains to be seen and over a period of time, one can expect Holcim to consolidate (original report by Ravi Ananthanarayanan)