Orient Cement jumps up to 9.5% on merger news with Ambuja Cements, but ACC is subdued; here is why

At the time of writing this article, Orient Cement shares were trading 5.61% higher at ₹172.69 apiece on the NSE, while Ambuja Cements was trading 1.76% higher at ₹549.45 on the NSE.

ACC Ltd shares, on the other hand, were trading 1.21% lower at ₹1,761 on the NSE.

The post-merger of the subsidiaries – ACC Ltd, Orient Cement, Penna Cement, and Sanghi Industries – "will become an integral part of Ambuja" with a capacity of 107 million tonnes per annum.

The board of Ambuja Cements Ltd (ACL) on Monday approved the scheme of amalgamation of merging ACC and Orient Cement.

Most analysts have welcomed the merger news; however, a few of them note that the share swap ratios are neutral for ACC minority shareholders and positive for Orient minority shareholders.

This could be the reason behind ACC's shares trading in the red.

Rationale behind merger

"The merger will unlock greater operational efficiencies, optimise manufacturing and logistics, and enable efficient capital deployment. These improvements will boost profitability, support capacity expansion, and enhance long-term shareholder returns," said ACL in a statement.

What shareholders should know

As per the proposed scheme of arrangement, Ambuja Cements will issue new equity shares to the shareholders of ACC and Orient Cement based on the prescribed swap ratios.

• For every 100 equity shares of ACC (face value ₹10 each), eligible ACC shareholders will receive 328 equity shares of Ambuja Cements with a face value of ₹2 each.

• Similarly, for every 100 equity shares of Orient Cement (face value ₹1 each), eligible Orient Cement shareholders will be allotted 33 equity shares of Ambuja Cements, each with a face value of ₹2.

What leading investment firms say on merger, swap ratio

Analysts at JP Morgan say that the merger was anticipated. With this announcement, ACC stock should start to track that of Ambuja Cements closer. The Indian cement industry is likely to face material capacity growth over the next few years, while demand growth is expected to remain modest.

This can pressure utilisations for most, they opine.

Meanwhile, Morgan Stanley said that the proposed share swap ratio is 328:100 for ACEM:ACC and 33:100 for ACEM:Orient. The investment firm notes that share swap ratios are neutral for ACC minority shareholders and positive for Orient minority shareholders.

Per the company, synergies will drive operational efficiencies, unlocking at least ₹100 trillion in cost improvements. Morgan Stanley sees this as a positive development, as it removes the overhang of managing multiple listed companies under ACEM and should be viewed favourably by shareholders.

CLSA notes that the amalgamation of ACC and Orient with Ambuja will lead to around 10% value accretion for Ambuja’s shareholders per scenario analysis.

"With ACC trading at a sharp discount to Ambuja (meaningfully underperforming Ambuja over the past few years), this implies value accretion for Ambuja shareholders," they note.