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Published on: May 19, 2022, 6:26 p.m.
Adani’s biggest bet
  • Adani with Jenisch: Adani's offer to buy out the entire company made the difference

By Daksesh Parikh and Sajal Bose

Gautam Adani is a man who follows his instinct, his gut feeling. Before acquiring a company, he does not have a team of experts who sieve through reams and reams of data and makes power point presentations to help him arrive at a conclusion. “His decisions are quick. It is a one-man decision and that is how he scores over others,” says a senior banker. In bidding for Gujarat Ambuja Cements and ACC, Adani has probably done the same thing. After looking at the pedigree of owners, he would have taken a call.

While Ambuja Cements is a relatively young company, started in the 90s, ACC is an 85-year-old company. Through this period, it has seen several ownership changes.  The longest was the tenure under the eminent lawyer, Nani Palkhivala who ran it for nearly four decades. Thereafter, it had changed hands before finally moving to Holcim. 

Holcim has been managing both ACC and Ambuja Cements for the past decade and in the process, honed these world class assets with good global practices. The assets would indeed be valuable to any owner. Mumbai Airport was also taken over by Adani during the Covid year 2020, in a similar fashion. In the case of Mumbai Airport, the entire airport built by the GVK group was indeed a great asset.

Bidding war

When Holcim announced its intention of selling out, initially, there were two serious contenders. Sajjan Jindal of JSW Steel and Gautam Adani. Both first generation empire builders, both large risk-takers. Had Jindal, also an astute businessman, underbid for this valuable asset? “Unlikely,” says one investment banker. Both organisations knew the value of getting world class prized assets with a combined capacity of 70 MT at one go. Both knew the arduous task they would have in building such capacity by taking over fragmented capacities from smaller players spread across India.

Holcim’s entire holding of 63.2 per cent in Gujarat Ambuja Cements along with its stake of 50.4 per cent in its subsidiary ACC were held in a Mauritius based company with the ultimate owner being a company in the Netherlands belonging to the Holcim group. This Mauritius based company also held a 4.48 per cent stake in ACC. While Jindal must have bid to buy the shares of Gujarat Ambuja Cements from the company, Adani offered to buy out the entire company from his Mauritius company, Endevaour Trade and Investment, as indicated in the mandatory open offer made to acquire 26 per cent of the shares in ACC at R2,300 per share and 26 per cent shares in Gujarat Ambuja Cements at Rs385 per share.

 The takeover of the Mauritius company would mean that any liabilities accruing in future on any company would have to be settled by the new owner. This effectively provides Holcim a clean exit from past liabilities and also ensures zero tax liability due to the tax treaties in place between the Netherlands and India. In particular, it would absolve penalties accruing in the future from any regulatory lapses or fines imposed by the Competition Commission of India in the past. This liability if and when it materialises, will be borne by Adani.

Both Jindals and Adanis had tied up funds by putting in a part of their own funds and borrowing the balance by pledging the shares of the target company, as is normal in the case of any leveraged buyouts (LBO). In Adanis, the bankers who had committed funds include Standard Chartered Bank, Barclays and Deutsche Bank. The latter, along with ICICI Securities, is the investment banker to the open offer issue made to both Ambuja Cements and ACC. Jindals, who had committed to put their own funds, had also tied up with private equity. While analysts feel that the bids of both may not have been too different, it was Adani’s offer to buy out the entire company and assume the contingent liability which would have really made all the difference.

Charges of cartelisation

 The Competition Commission of India had, in a 2016 lawsuit, fined several companies including ACC and Ambuja Cements, on charges of fixing prices or cartelisation. The combined fines work out to Rs2,302 crore (including Rs1,164 crore on Ambuja Cements and Rs1,148 crore on ACC). The Supreme Court has yet to give its final verdict. At a press conference held by Holcim after the announcement, Holcim’s global CEO, Jan Jenisch mentioned that it was a straightforward deal from its side with no further identification.

The risk-taking ability of Adani, cynics say, bordering on bravado, was also seen when he took over the management control of Mumbai Airport from the GVK group in September 2020. He assumed all the debt and as well as the liabilities of the GVK group, including corporate guarantees given to lenders assuming the debt provided by a consortium of lenders including Goldman Sachs, HDFC and SBI.  

In one of the earlier interviews to Business India, (see issue dated 8 July, 2012) when asked about whether (his) taking on huge debt to develop the asset could put the group at risk, he responded: “Debt, in any infrastructure project, is a given. When you are moving fast you need to have access to more and more funds. One should not worry about debt if the project parameters are sound…” This policy continues even after a decade. Borrowings against shares of Ambuja Cements and ACC would be paid by the profit-making assets of the company.

Cement companies have seen several ups and down across the economic cycle. But currently it is a pretty mature industry which has a lot of stability in terms of overall growth and balancing future demand with supplies; good profits have also been generated. “For the last 10 years, the cement industry was an outlier,” says Ajay Garg, Founder, Equirus Capital, a full service offering investment bank, adding: “Cement will be one of the best assets in Adani’s portfolio.” For the year ended March, ACC has an installed capacity of 36 million tonnes per annum (MTPA) across 17 plants across India. It also has 78 ready mix concrete plants. Ambuja Cements has 31.45 MTPA capacity with another 1.5 mtpa in the process of being added before 2023. Ambuja Cements’ capacities are spread across six plants and eight grinding units.

It has five bulk terminals to move cement through the coastal route. Adani, with one of the largest port capacities in India, can use this mode of transport to the hilt. Like ACC, it is also adding grinding capacities and a cement unit in Bihar. With its good project execution skills Adani can well add balancing capacities to produce more cement from the existing capacities in both plants.

It would be one of the best profit-making assets in the Adani group. The consolidated profit of Ambuja would be the highest amongst all companies. Adani Ports and SEZ results for FY22 have yet to be announced but they could not compare to the consolidated profit of Rs5,163 crore earned by Ambuja in 2021.

Risk taker

Taking risks is inherent in business. All the more so with Adani. It is this ability and the execution of world class ports, which has seen Adani’s empire, as measured by the market cap of his listed companies, growing from Rs1.25 lakh crore in FY11 to Rs14.73 lakh crore in FY22. In the same interview, 10 years ago Adani was asked whether this risk-taking appetite tends to diminish with age and whether he would be able to maintain the scorching pace of growth. “One tends to become wiser with age. I always see every decision as a learning experience. The pace of growth will depend on opportunities and as long as our strategy is intact, I do not see any problems, going ahead.”

Starting as a trading outfit, Adani Enterprises, Adani has been building assets across the infrastructure space. Be it in mining or power, green or thermal, city gas pipelines, distribution of power, trading (with coal being the biggest commodity traded) food grains, construction, property development, and now cement. The synergies are, however, more visible – the utilisation of coal ash from his power plant, multi-modal transport through his ports and uninterrupted supply of coal and power from the other companies in the portfolio.

Adani is also the largest trader of coal and supplies to major companies across the group. In an interview to ET Adani says: “The drivers for this decision (to bid for Ambuja Cements) are based on two primary factors. The demand-supply gap and the synergies with our existing businesses.” Adani’s business model in a manner will be totally different to others.

 Portfolio companies

Edible oil is the odd man out but judging from his recent moves he wants to build a portfolio of consumer business in this company. In 2012, only Adani Enterprise, Adani Ports & SEZ and Adani Power were listed. Adani Wilmar was not yet listed. Adani Wilmar was listed recently and is valued at Rs79,000 crore. It is the only company in the group which is valued below Rs1 lakh crore.

The market cap of the seven listed companies in the group is now Rs14.73 lakh crore. This excludes the airports and his other unlisted companies in mining including the ones in Australia and Indonesia. Adani group is also big in construction and property development. In 11 years, he had added nearly Rs13.50 lakh crore. No mean achievement by any standard.

 Challenges ahead

Arranging finance is a relatively easier task. The more important challenge is on the cultural front. Will the two companies accept a new owner? Ambuja Cements is a relatively new company, started by Narotam Sekhsaria. Sumit Banerjee, an ex-CEO, ACC says: “ACC has taken in its stride more than its share of M&As. One can only hope that this is the last, at least for the foreseeable future. Through all these ‘change of hands’ as it were, ACC has retained its character through cycles. I will be happy if this tradition is maintained.”

This is one of Adani’s largest M&A transactions and he has gone on record to state that he has not yet met the entire leadership team. He would most likely continue to have the same team but have a better control mechanism in place. Adani, has over the last five years, acquired 35 companies and “our track record in assimilating teams into our organisation is a testimony to our M&A strategy.”

Earlier, before Holcim, there used to be healthy competition between ACC and Ambuja Cements, with the latter more aggressive. In the case of ACC, the owners were more benevolent. To what extent Holcim has been able to change that will be tested by Adani, once he comes on board, post the green signal from the regulators. This may take six-nine months, at the very least.

Both will have to grow to make up for the tardy growth during the last ten years. UltraTech was able to become the number one through takeovers. Holcim did not participate in further M&A activities. It had to allocate funds across the globe, not just India.  In the case of Adani, ambition to be the number one will probably see him allocate higher capital for both companies. It is focussed totally on India.

Growth is the mantra

After all, size matters, a lot, today in the cement segment. Gone are the days when cement companies took a few generations to put up sizeable capacity. Now, a wealthy corporate with deep pockets finds the opportunity to enter the segment or ramps up the capacity quickly through acquisitions and becomes a significant player in the industry. The acquisition has secured Adani the second position in the cement industry after the Kumar Mangalam Birla-owned UltraTech.

The two companies are among the strongest brands in India, with immense depth of manufacturing and supply chain infrastructure with over 50,000 channel partners across the country. Commenting on Adani’s acquisition, Nikhil Saboo, senior analyst of SKP Securities explains: “Adani has got a readymade market and the capacity as well. Surprisingly, due to the parent company’s philosophy on the India market, ACC and Ambuja have not majorly expanded their capacity at per with other large players like UltraTech, Shree Cement and Dalmia Cement. Now in the next few years, they will grow aggressively to ramp up their market share.” Adani’s thermal powerplants in the country and logistics will allow them easy access to fly ash and smooth transportation of raw material and the finished product, adds Saboo, who tracks the cement industry. 

 “Our existing businesses will be able to build a uniquely integrated and differentiated business model and set ourselves up for significant capacity expansion,” says Gautam Adani, chairman, Adani Group. The group is likely to raise capacity to 100 million tonnes from the present 70 million tonnes per annum and has been eyeing reaching the top slot in few years.

With the government’s focus on infrastructure development and housing, there is significant potential for the growth of the cement sector in India. It is currently growing close to 8 per cent. The post-pandemic recovery in construction and other infrastructure sectors is expected to continue, driving the growth of the cement sector over the next several decades.

 India is the second largest cement producer in the world after China, with a capacity of 545 mtpa. But the per capacity cement consumption is merely 200 kg as against world average of 500 kg and China has highest with 1,750 kg. With the strong focus on infrastructure (India is a growing country) 25 million tpa would need to be added every year.  Currently, the country produces 350 mtpa, which is expected to grow to 550 mtpa by 2030. The production of the top 5 companies constitutes the bulk of the production. 

Reacting to Adani’s entry in cement, Diwakar Payal, president marketing, Shree Cement says: “It is good that a foreign company has been replaced by an Indian. So, the profit generated will be redeployed in the country by the Indian owner. Also, Adani’s large presence in renewables will make them cost efficient in cement manufacturing. It will be good for the industry too.” Payal feels Adani borrowed heavily to fund the acquisition and servicing that debt would be tough, although the group has deep pockets. Shree Cement is the third largest player in the industry and has grown tremendously in the last 10 years. The company’s philosophy is to expand through greenfield instead of acquisition. Greenfield is cheaper, says Payal.

Consolidation game 

In a bid to accelerate payback Adani may well be tempted to raise prices in a hurry. In which case it could see severe competition in the industry. Something the industry has not seen for a while. According to an industry expert, “there would be consolidation and economy of scale will come into play. But cement being a regional business, the cost-efficient players with reputed local brands will always remain viable”.

 Ambuja Cements and ACC Ltd have built their sustainable development ambitions on global standards and are aligned with Holcim’s sustainability strategy. It set ambitious 2030 climate targets that are validated by the Science-Based Targets initiative (SBTi) and are looking beyond 2030, to support the development of the first climate targets for a 1.5°C future in the cement sector with ‘net zero’. It aims to reduce CO2 to 463 kg CO2/t cement. A unique initiative is the construction of a Waste Heat Recovery System in three locations by 2022 that would generate 54 MW to support power requirements in its plants.

Holcim’s initiatives focus on four priority areas, Climate and Energy, Circular Economy, Environment, and People & Community. These initiatives include reducing clinker factor through the incremental use of alternative materials like fly ash, slag, and waste gypsum. Second, improving energy efficiency (thermal and electrical) and process technology. Third, waste heat recovery and the use of Renewable Energy (RE) and the fourth is optimisation of fuel composition, along with the use of waste as alternative fuel.

The company claims that these initiatives helped its operations prevent the release of 6.5 million tonnes of CO2 into the environment during 2020. Holcim’s global leadership in cement production and sustainability best practices could bring cutting-edge technologies that will allow Adani to accelerate the path to greener cement production.

Adani’s bold initiative to become the number two cement player may well alter the portfolio of the group. Like Kumar Mangalam Birla, Adani is ambitious. And a man in a hurry. It will be interesting to see how he tries to take the pole position in cement. Birla is unlikely to play dead. He will try to ensure that the distance between him and Adani keeps on increasing rather than diminishing. It will be an interesting story in cement. 

Deal size and actual cash payment

Adani has agreed to pay CHF 6.4 billion to Holcim. This translates into $6.537 billion. Besides the actual payment to Holcim, cost of open offers also has to be taken into account. Adani has to make a mandatory open offer to buy 26 per cent shares of Ambuja Cements and ACC. In case of Ambuja Cements the offer to buy 51.63 crore shares at Rs385 per share works out to a little under Rs20,000 crore (Rs19,879 crore to be precise). For ACC, like wise the offer to buy 4.89 crore shares at Rs2,300 per share works out to Rs11,300 crore.

But the way the share prices are moving, Adani may not really have to make any further payment towards the open offer. In essence, he will be able to get the management of both companies for a little over Rs50,335 crore. Ambuja Cements on a consolidated basis had cash and cash equivalent of Rs11,358 crore. This may well be used to buy raw material and energy from Adani’s sister companies in the group!

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