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ACC, Ambuja To Supply Cement To Each Other At A Discount

ACC, Ambuja Cement offers services, raw materials to each other at a 5 percent discount.

A worker unloads a sack of cement from a freight train in Mumbai, India (Photographer: Kuni Takahashi/Bloomberg)  
A worker unloads a sack of cement from a freight train in Mumbai, India (Photographer: Kuni Takahashi/Bloomberg)  

ACC Ltd. and Ambuja Cements Ltd., which put their planned merger on hold, have agreed to supply cement to each other at a discount. The agreement also provides for supply of clinker and raw materials such as fuel, fly ash, slag and gypsum and spare parts.

Both the companies, controlled by LafargeHolcim, sought approval from their respective shareholders to “enter into, execute and deliver the master supply agreement”, as per the separate regulatory filings. According to the pricing formula, either party would get a 5 percent discount on the average net selling price.

The cement makers on Feb. 27 said they wouldn’t proceed with the merger proposed in May last year. The boards of the companies approved an arrangement for sale and purchase of materials and services on mutually agreed terms to “maximise synergies and unlock additional value for shareholders”.

Here’s how the pricing will be decided:

  • Toll grinding prices would include conversion charge of 8 percent of gross fixed asset block in addition to a 10 percent mark-up to manufacturing plant’s variable cost per tonne of the previous quarter.
  • Clinker sales will be decided either by market price, market price determined by independent agency appointed by directors or a 35 percent mark-up of clinker variable cost of the previous quarter.
  • Procurement of raw materials and spares at replacement cost or purchase cost with a carrying cost of 8 percent per annum.

Brokerage Take

As the two companies stopped short of quantifying potential cost savings from the master supply agreement, it is yet unclear how much of the expected synergies have already been realised, brokerages said.

Ambuja Cements, during the proposed buyout of Holcim’s stake in ACC in 2013, forecast synergies of Rs 780-900 crore per annum. Of this, Rs 360-420 crore savings was estimated from the optimisation of the supply chain and another Rs 420-480 crore from shared or fixed cost synergy.

The companies are already realising some of the shared/fixed cost synergy, and the proposed agreement is predominantly focused on achieving operational synergy. Based on the earlier management estimate, this could be approximately 9-10 percent of the combined ebitda of both companies.
Morgan Stanley Note

Goldman Sachs disagreed, saying that the actual synergies realised will be short of market expectations.

The group had outlined material swap synergies of Rs 360-400 crore when the merger was contemplated. However, the actual volume swap may be much smaller.
Goldman Sachs Note