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India's largest cement firm, Ultratech Cement, has joined the race to acquire the Holcim stake in Ambuja Cements and its subsidiary, ACC. UltraTech — part of the Aditya Birla Group — submitted a non-binding bid on Wednesday.
Swiss multinational Holcim, which manufactures building material, is exiting India by selling its 63.19% stake in Ambuja Cements.
According to banking sources, UltraTech has submitted a plan to Holcim, outlining divestiture details that would meet the norms set by anti-trust body Competition Commission of India.
UltraTech currently has a total capacity of 120 million tonnes while Ambuja Cements and ACC have a capacity of 64 million tonnes per annum.
In several western states in the country, UltraTech and Ambuja have plants in close proximity to each other.
To meet the CCI norms, UltraTech will have to sell a few plants, a banker said.
The spokespersons of Ultratech and Holcim declined to comment.
Another banker said it does not make financial sense for Birla to pay a very high amount for buying the companies and then sell some plants at a discount just to meet CCI norms.
“There are several other cement companies that will be on sale soon,” the banker said.
“The year of consolidation in the cement industry will start after the Ambuja deal as more capacity will come up for sale,” the banker said.
With a market valuation of Rs 1.8 trillion, Ultratech will emerge a strong contender for Ambuja Cements and take on the Adani group, which is considered a front runner.
But a strong dollar and rising interest rates are turning out to be a big concern for the bidders who are preparing the war chest for the deal to acquire the cement companies and later make open offers for Ambuja and its subsidiary ACC.
Bankers said the private equities are seeking an internal rate of return of 20 per cent on their investments for the acquisition — making the acquisition for the Indian bidders very expensive.
“As bidders will have to repay the debt by earning in Indian currency, the falling rupee is not good news considering the investment in both companies will be as high as $10 billion,” said a banker.
Most of the funding by the bidders is raised overseas with private equities taking the target companies’ shares as collateral.
If the rupee weakens further, it would put additional burden on the acquirer.
“A half a per cent rise in the interest post US Fed rate hike and falling rupee is like a double whammy for the bidders.
"Besides, the acquirer will have to make additional investment in raising the capacity of both companies which have been stagnant for the last 15 years under the Holcim management,” said another banker.
All the bidders including Adanis, JSW and the Aditya Birla group are engaged with bankers and lawyers to strategize on the next steps including getting the CCI clearance and making the open offers.
The JSW Group chairman Sajjan Jindal has said they have offered $7 billion to Holcim.
The Adani group has tied up with several West Asia-based sovereign funds for the deal.
Ultratech is raising funds on its own but is not an aggressive bidder, said a banking source.
Adani group is seen as a frontrunner for its cash rich balance sheet and fund raising capacity.
With a net worth of $114.8 billion, Gautam Adani is currently ranked number five on the Bloomberg Global Rich List.
Bankers said as the Adani group does not have any presence in the cement sector, it will not face any objections from CCI unlike Ultratech.
