This does not flow to Gujarat Ambuja now, but the transaction could be the basis for any exit price if it decides to sell its stake in Ambuja Cement India. FIIs which had invested in the latter have exited with an annual return of just about 10 per cent. The difference in returns highlights the benefits for Gujarat Ambuja in the pricing of the deal.

The cost of Gujarat Ambuja's holding in ACC declines by about 20 per cent, neutralising to a large extent the premium price paid to acquire the stake from the Tatas in 1999. Without straining its resources and creating a listed outfit, it has fulfilled the exit option that had to be offered to the FIIs at the end of five years.

Having taken a massive commitment in buying into ACC, Gujarat Ambuja was never likely to cede its hold without an attractive price. It has now secured the price it sought even as it has increased its stake, putting in place a settled arrangement that obviates concerns of a hostile bid for ACC and retaining the option to cash in on a higher stake later.

The benefits of synergy at the ground level now available would get enhanced as Holcim brings its expertise to the table; overlap is limited in terms of geographies. As a fine balance emerges between demand and supply in the key markets for the two companies, the strategic partnership would enhance pricing clout, too. The combine would have two of the more powerful brands in the sector.

A merger of Ambuja Cement Eastern and ACC is likely. A merger of ACC with Ambuja Cement India, especially if the latter gets listed, may also remain a strategic option, which would be value-accretive should it be exercised. Such a course would remove from Ambuja Cement the character of an `investment vehicle'.

For several years, ACC remained vulnerable to a hostile bid which, to an extent, explained the higher price earnings multiple that the stock enjoyed. Ever since Gujarat Ambuja picked up the Tatas stake, there has been a quantum improvement in the operating efficiency levels of ACC. It has also become aggressive in marketing and acquisitions.

For instance, in the boom year of 1999-2000, when the industry grew by 15 per cent, ACC was a laggard. But over the past four years, it has pushed volumes aggressively. It also absorbed lower prices in 2003 in an effort to market the entire output of its new unit in Maharashtra and ensure 100 capacity utilisation. With Holcim now likely to play an active role in the day-to-day management, ACC, too, is likely to benefit from its expertise.

This deal is a positive for ACC over the long term, but the stock price could for now trade at lower levels compared to the open offer price of Rs 370. There is a good chance that at least half of the holdings will be accepted in the open offer.

Given the improvement in fundamentals and the likelihood of further progress, shareholders can hold the stock. A view on the open offer can wait till it opens for tendering on March 9. For shareholders of Ambuja Cement Eastern, the open offer is a good exit opportunity.

At the industry level, the Gujarat Ambuja-Holcim combine means a greater threat than before to competition, especially Grasim Industries. With 33 million tonnes, the latter is the leader in terms of capacity. It has just completed a buyout of Larsen & Toubro's cement business and the enhanced competitive threat could lengthen the payback period.

India Cement, Jaiprakash Associates, Mysore Cement, Gujarat Sidhee Cement and Prism Cements would now be prime candidates for acquisition. Two outfits that would be much sought after, but which are unlikely to play ball, are Madras Cements and Shree Cement. They can, however, take comfort from knowing that their capacities can command an attractive price, if and when they decide to either sell out or rope in a strategic partner.

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