The Ambuja Scheme: Management POV
Ambuja Cements Managing Director Onne Van Der Weijde, in an interview to CNBC-TV18’s Menaka Doshi, explains that a restructuring of operations is more cost-effective and offers more synergies. He adds that deployment of cash does not deplete Ambuja’s cash reserves significantly and would still allow for acquistions and expansion.
Below is the edited transcript of the interview on CNBC-TV18
Doshi: Let me start by asking you, if this was the structure that you had originally envisaged when you entered India and you acquired control over a period of time in two leading cement companies — ACC and Ambuja — was subsidiarisation the first step towards full consolidation?
Weijde: No I don’t think so. That was not part of our plans at that time. It was developed over time. But first I would like to explain what we are doing now. We want to create more value by going after synergies.
We have been working with Ambuja and I was previously the CFO of ACC. We have been working with both companies to achieve synergies, cost reductions, implement policies and set up governance structures. A lot has been already implemented. Earnings at Ambuja and ACC are under pressure due to impact on the topline from poor growth in volumes and prices. So, we started to focus on measures to improve the bottomline.
Doshi: Can you explain why you did not find it appropriate to carry out a full merger at this point in time?
Weijde: We have targeted two specific areas of synergies and I don’t think a full merger is needed to achieve that.
Doshi: So is a merger still an option?
Weijde: It is still an option that we will exercise after synergies in a majority of areas are achieved. Though a full merger may offer synergies, there is also a significant element of cost involved.
Doshi: Won't implementing synergies also take up a lot of time? In the newly-formed India management committee structure, the management of both ACC and Ambuja will have to work together along with representatives from parent Holcim to arrive at synergies. So why not conduct the merger and then arrive at synergies?
Weijde: The synergies would result in benefits worth Rs 900 crore which is not a small amount.
Doshi: Wouldn’t a merger offer increased benefits?
Weijde: Yes, but a merger might turn out to be a distraction too. It is only after considerable evaluation of the options available that we decided to enable the synergies first.
I would also like to clarify the management structure you mentioned. There are completely two independent management teams and it is only in the targeted areas that the management of both companies will work together. And there will be no participation by representatives from Holcim.
Doshi: Did you get unanimous approval from the independent directors for this restructuring proposal?
Doshi: And did your independent directors raise questions?
Weijde: They raised a lot of questions and wanted a lot of explanations.
Doshi: Did any of your independent directors raise questions about the rationale for Ambuja Cements having to buyback 9.7 percent of its own equity owned by Holcim India?
Weijde: They were some initial questions about whether it was necessary. But when I explained that it was basically a washout and was for historic reasons, they agreed. The shares that we are acquiring will be cancelled.
Doshi: Though this leads to a lower dilution than otherwise required to purchase that 50 percent stake of ACC, it also results in is the consumption of almost all the cash on Ambuja's books which then ends up in the parent’s hands via an investment subsidiary in Mauritius. Do you agree? What about the price that Ambuja pays to buy 50 percent of ACC that is owned by the parent at current market price without paying a control premium?
Weijde: I am very happy that you have picked that up. Actually the transfer price is very fair.
Doshi: My question on the rationale for Ambuja to do that remains. So, Ambuja gets incremental benefits from issuing 44 crore new shares that will enable it to purchase 50 percent of ACC at a valuation that is close to current market price. It should seem fair to all concerned. So, if it buys into synergies, shouldn’t they be able to have no problem with this leg of the transaction?
Weijde: According to Ambuja's balance-sheet is, it is actually a debt-free company and has sufficient levels of cash reserves. Initially the members of the board asked the same question — ‘Why not carry out a full share-to-share merger with Holcim India instead of emptying the cash reserves? But then I recalled that the board had approved plans to expand and had given the go-ahead for a greenfield project at Marwar Mundwa. So, as Ambuja grows and matures over the years, the levels of cash reserves are adequate. We have looked at acquisition to achieve our expansion, but to buy assets of good quality in India is not easy. I had also sought the board’s approval for acquiring a company.
Doshi: This is interesting. Which company if I may ask?
Weijde: No, I don’t want to explain.
Doshi: Could you broadly indicate in which part of India?
Weijde: Well, the deal didn’t go through.
Doshi: How large an acquisition could it have been?
Weijde: It was not a very substantial one. So, nothing like the size of ACC, unfortunately. So, we have a lot of cash. The cash element in this transaction is beneficial for Ambuja’s shareholders because it will allow me to make acquisitions and build plants. But from a longer-term perspective, Ambuja’s balance-sheet will be strengthened and if it acquires ACC, there still will be Rs 4,000 crore in cash.
Doshi: But will that not be in the subsidiary and not be available for Ambuja’s private expansion plans?
Weijde: Absolutely. But the cash will be available to Ambuja at the consolidated level.
Doshi: But what about public shareholders at both levels?
Weijde: Ambuja’s shareholders will look at it like that.
Doshi: To some extent, yes, but isn’t the cash that Ambuja had on its balance sheet now being used in buying back 9.7 percent of its own stake?
Weijde: No. It is not buying back 9.7 percent because that will get cancelled and that is why the new shares are being issued. This transaction is for around Rs 12,000 crore with Rs 3,500 crore in cash and the remainder in the equity that flows from Ambuja acquiring ACC.
That is a very fair deal and it is an acquisition like any other in the end. A majority of the payment will be paid in shares and the rest in cash. I think it is better to use some amount of cash, even if it is not allowed in India, than to go and borrow because the weighted average cost of capital is too high.
In my view, cash on the balance sheet should be put to productive use because the returns that it generates is too meager due to high levels of inflation. So the more cash I use, lower is the dilution effect and lower is the weighted average cost of capital. And that is beneficial for Ambuja's shareholders.
Doshi: What do you make of the view that by completely doing away with all the cash on the balance sheet, you are constraining the ability for organic and inorganic growth in the years to come?
Weijde: There is no restraint at any point in time due to this transaction.
Doshi: How would you respond to the argument that the transaction is a much smarter and tax efficient way to unlock the cash from the Indian operations as oppose to upping the dividend outgo because dividend is taxed in this country? While this may benefit Ambuja’s shareholders it also results in a Rs 3,500-crore benefit to the parent company which is in dire need of funds at this point in time?
Weijde: I don’t want to speculate what one of my major shareholders is doing with the money.
Doshi: Your only major shareholder?
Weijde: Yes. I agree on the benefits accruing to Holcim. But in my opinion, to a larger degree it is Ambuja’s shareholders that will benefit.
Doshi: So, does Holcim enjoy twice the benefit because as a shareholder of Ambuja it enjoys all the benefits along with Rs 3,500 crore in cash in a more tax efficient way than it would have if that money had come via dividend payouts?
Weijde: Yes. But I don’t want to speculate on that part. Holcim also has a price to pay because it will, over time, have to invest because it has given up a part of economic ownership in India and will have to rebuild that ownership.
Doshi: But hasn’t it enhanced its ownership of Ambuja?
Weijde: Yes, but economically it owns less of ACC. So, there is a price to pay for Holcim and this is the price it is paying. So, there is no free lunch, not even for Holcim.
Doshi: Given your ownership of Ambuja will eventually at the end of this restructuring, if approved by shareholders, stand at roughly 61 percent and your economic ownership of ACC will be reduced to roughly 30 percent. Is that correct?
Weijde: Yes, So, that’s the price Holcim pays.
Doshi: But could this also mean that the future growth that you drive in this country would be through Ambuja and not through ACC because your ownership of Ambuja is higher. But now Ambuja now has no cash, do you plan to raise large amounts of debt to drive that growth?
Weijde: Even if the transaction were to happen today, which it has not, Ambuja would still have over Rs 400 crore of cash in the balance sheet.
Doshi: You wouldn’t have needed to borrow it if you hadn’t extinguished that Rs 3,500 crore?
Weijde: You are absolutely right, but think about the argument of an efficient capital structure. But not having any debt on the balance sheet and just sitting on cash reserves is not a good thing. That is not good financial management.
Doshi: Would you prefer to drive future growth using Ambuja and not ACC because that is where Holcim’s primary and largest stake lies?
Weijde: No. Ambuja, over time, will acquire more shares in ACC. And that will be done at a commercially interesting price.
Doshi: Would this amount to a selective buyback other shareholders don’t have an opportunity to participate in?
Weijde: No. Ambuja will also issue more shares to Holcim again.
Doshi: But that is some sense consideration for the 50-percent stake ACC? In short, 58.4 crore shares amounting to roughly Rs 11,200 crore based on the current market price of two days ago is virtually equal to 50 percent of ACC. So, a bulk of the Rs 3500 crore is actually to pay for the 9.7-percent Ambuja stake?
Weijde: I think we have made the transaction a little bit more complicated. If 10 percent of Ambuja would not have been there you would have seen that the calculation would have come out more or less exactly the same. So, it is not a selective buyback at all.
Doshi: Does this mean that there would have been higher dilution on the Ambuja balance-sheet to pay for – an incremental higher dilution?
Weijde: No. In a way, it’s a washout. The shares are there, get issued and then get cancelled. Of the 58.4 crore shares, 14 crore cancelled and we end with 44 crore shares. If you were to go about it, we are spending 24 percent to buy Holcim India and that holds ACC.
So, if Ambuja's 10 percent would not have been there, the cash outgo would have been Rs 700 crore lower because Rs 2,800 crore is for ACC and about Rs 700 crore is for the part paid in cash.
But if that would be the case then probably the percentage would have been a little bit higher because the amount is somewhere targeted where the reserves of Ambuja are and what I am after is an efficient capital structure.
Doshi: Did you consider having Holcim India sell its 50-percent stake in ACC to Ambuja and hold on to that 9.7 percent stake that it had of Ambuja?
A: For me that did occur as just a technicality. I never applied my mind to it.
Doshi: But you just said you presented several options to the board. So, I imagine that this would have been – this is the simplest option, so this would have been one of the options you examined?
Weijde: For me, this is such a washout that I never looked at it. The option I have evaluated and discussed is for example — Should we do a 100-percent share transfer with no cash element? On the face of it that looked easy. But again I want to make my argument about efficiency of the structure.
Doshi: I am not asking whether you spent cash or shares to buy the 9.7 percent stake that Holcim India has in Ambuja. Why does Ambuja need to buyback its own shares at all?
Weijde: It didn’t buyback its own shares.
Doshi: It has. It is buying back its own shares because that is part of the valuation of Holcim India…
Weijde: But then it cancels them. So, there is no payment for it then.
Doshi: But it still amounts to a buyback. When you buyback from a parent company and you cancel it, it is a selective buyback. Whether you pay cash or shares for it is secondary. Could this entire restructuring have been done without Ambuja having to repurchase that 9.7-percent stake that Holcim India has?
Weijde: It has repurchased it by issuing shares.
Doshi: But there would have been no need to issue shares if it had decided not to repurchase it at all?
Weijde: We acquiring 24 percent partly in cash and shares at the same price. So, it is a complete washout.
Doshi: Was this the best deployment of your cash, because the bulk of your cash is going towards repurchasing 9.7 percent of your own shares?
Weijde: No, its not. It is in the same ratio of 24:76.
Q: And you don’t regret the loss of the cash?
A: I am very happy if I can deploy cash to get such a fantastic asset in return.