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S. Vaidya Nathan

GRASIM'S firm hold over the cement business of Larsen & Toubro has the potential to trigger interest in the ACC stock.

Gujarat Ambuja Cements (the Ambuja group) has positioned itself to take eventual control though it may need to act decisively towards this goal. It is three years since it picked up the 14.4 per cent stake from the Tata group.

Strategy to date: Having waited out a three-year period to avoid an open offer, even if it decides to make a voluntary open offer, Gujarat Ambuja can do as at market-linked prices.

Having waited out the three years, Gujarat Ambuja can also christen itself the `promoter' and use the creeping acquisitions route to raise its stake. But this route will mean a four-year period for it to even raise the stake in ACC to about 35 per cent.

Risk of hostile bid: The sea-change in the cement industry consolidation following Grasim's decisive moves on L&T makes such a long waiting period a big risk. Even without the Grasim-L&T deal, the threat of a hostile bid for ACC has been a real one.

The difficulties faced by the global majors, the foothold that the Ambuja group has and the passive role played by the financial institutions, all have ensured that there has been no hostile bid to date.

But this state of affairs may not continue. A hostile bid, in Rs 300-400 per share range by any MNC, can lead to warm response from ACC shareholders. The institutions too may be hard-pressed to turn away from such an offer.

Any such hostile bid has much potential to succeed. FIIs and public holdings in ACC at end-March 2003 was about 63 per cent. The financial institutions and the Ambuja group hold about 37 per cent.

In contrast, in L&T, Grasim and the FIs, which backed it, held about 57 per cent. This control of over 51 per cent was adequate enough to snuff out any interest any MNC may have had. Now, Grasim is set to go past this key controlling threshold in L&T on its own.

Grasim gets aggressive: By moving quickly to get the demerger done on its terms, Grasim has effectively shut the door on MNC aspirants.

The demerger model proposed by the L&T management would have left room for MNCs to come in with a stake of between 37.5 per cent and 51 per cent. That is now closed. It is not so in ACC's case. This is why the Ambuja group is likely to make moves to consolidate its hold in ACC.

Once it comes to a hostile bid situation, such efforts can become very expensive. It would almost be akin to lifting the stake to comfortable levels at the kind of price paid to the Tata group.

An acquisition of decisive control in ACC by Gujarat Ambuja at such price levels may not be a paying proposition.

Even at current prices, ACC is overvalued and enjoys a superior valuation to its peers, including Madras Cements and Gujarat Ambuja. The latter two score high on efficiency and profitability even in difficult industry conditions.

ACC's efficiencies and marketing strengths have improved following the `strategic alliance' with the Ambuja group. But it still lags the top players by a considerable distance. The prospect of an open offer keeps the stock trading at levels not supported by fundamentals.

ACC as stronghold: If Gujarat Ambuja can control ACC forever with just a 14.4 per cent stake (or at least prevent any MNC entrants), then it is an attractive deal. If an open offer is made at the market price levels now, that too will make for a good deal. However, it is not as good as the one cut by Grasim for L&T as ACC's efficiencies are considerably lower than that of L&T.

Still, it will ensure that, on capacities, the Ambuja-ACC combine almost matches the Grasim-L& T team. From a geographical spread perspective too, the Ambuja group needs ACC badly.

Decisive action needed: But Gujarat Ambuja can be sure about such a course of events only if it gets its stake in ACC to at least about 35 per cent.

The combined clout of the Ambuja group and the financial institutions would also be well in excess of 51 per cent. That may be enough to deter aspiring MNCs.

What strengthens the case for lifting the stake to higher levels without much loss of time is the attractive launch pad that ACC provides to any MNC aspirant.

Till the Ambuja group gets itself firmly in the driver's seat, MNCs will have an eye on ACC. If you are an ACC shareholder, stash away your shares and await action on the consolidation front.

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