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FINANCE & INVESTMENT CELL

ST. STEPHENS COLLEGE

DreaMerger 2016

Online Slot: 6 PM to 8 PM
Please remember the following:
1. You have 2 hours to solve the case study. This will test your logical,
analytical, reasoning and innovative skills.
2. All solutions must have the participants name and college.
3. Attach your solution in an email and send it to us on this email id-
dreamerger2k16@gmail.com
4. Please mail it to us before 8 PM. Entries after 8 PM will be disqualified.
5. All files must be in PDF format.
6. Solutions should not exceed 3-4 pages, in Times New Roman, size 12.
7. You are not expected to use any additional information. Bear in mind
that this case is based on 5th September, 2016. All facts and characters
are fictional.
8. State your assumptions clearly and justify them. Please show all relevant
calculations (if any).

All the Best!

Anhuoni Konch Cement Company Limited was founded on Sept. 1st 1997.
Listed in Hong Kong on Oct. 21, 1997, it pioneered the overseas listed company
in Chinese cement industry. The company mainly engaged in the production
and sales of cement and commodity clinker, is also the largest single brand
supplier all over the world. It is one of the largest cement manufacturer and
seller in Mainland China, headquartered in Anhui Province.

The high-grade cement and commodity clinker of "KONCH" brand are the
company's leading products. Products under this brand include portland
cements, ordinary portland cements, slag portland cements, compound
portland cements, sulphate resistance cements, cements, highway portland
cements, oil well portland cements, non-magnetic portland cements, nuclear
station portland cements and white cements, among others. The company is
currently running in countries in like UAE, Malaysia and Indonesia.
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After years of rapid development, the capacity is continuously rising, the level
of technology and equipment is improving, and the development areas are
expanding. The company has built five super ten million tons of clinker bases,
including Tongling, Yingde, Chizhou, Zongyang and Wuhu Conch; what's more,
three lines of 12,000t/d, presenting the advanced technology, are under
construction in Wuhu and Tongling Conch. The production lines of the
company all adopt technology of new dry process cement, with the features of
high production, low energy consumption, high degree of automation, high
labor productivity and good environmental protection. The company is
currently running with 34 plants all over China with 219.13 mt/yr production.

Besides its high technological development, the company has seen a standstill
due to macroeconomic doldrums in China. Due to imposition of strict control
over new production capacity of the cement industry, investment in the
industry continued to decline, with cement investments decreasing by 19.4%
year-on-year. To worsen the situation, the Chinese government has also
stepped up efforts to eliminate backward production capacity, leading to
continuous decline in growth of production capacity of the industry. The
cement industry has seen a drop from 10% to 7% annual growth over the
years. Besides the macroeconomic doldrums which China is facing, the direct
cement plant emissions is also becoming a significant problem in the country,
forcing cement companies to shut their plants.

Anhuoni Konch is failing miserably when it comes to product innovation and is


unable to bear the damages caused by the foreign producers. The R&D
department is not flourishing to an extent when compared to foreign
competitors, adding more problems in the companys account. Over the past
few years, the company is also suffering from a series of bad acquisitions,
further deepening its debts and reducing its profitability.

Due to these macro-environmental and developmental problems, Anhuoni


Konch Cements net profit has dropped by 45% year-on-year to US$123m in
the second quarter of 2016 from US$233m in the same period in 2015. Its
revenue fell by 5.5% to US$16.3bn from US$17.3bn. It attributed the decreases
in profit and sales revenue to falling prices.

Anhuoni Konch is now looking to overcome the revenue losses and to establish
its brand in foreign countries so to increase its production altogether, thereby
making its product more competitive globally with focus on making the output
environmental- friendly.
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Anhuoni Konchs statement of affairs (in billion dollars) on 31st August 2016:
Liabilities Amount Assets Amount
Long term debt 82.6 Cash and cash 10.29
equivalents
Equity 31.3 Investments 18.35
Current Assets 25.90
(including
inventories)
Fixed Assets 59.36
Total 113.9 Total 113.9

Estimated Annual Revenue: $16.3 billion


No. of employees: 40,000
Debt-equity ratio: 2.6:1

The company has approached you, a senior consultant at M&M consultancy


with the following three options:

OPTION 1: ACQUISITION OF U.T. CEMENT


U.T. Cement Limited is India's one of the biggest cement company and Indias
largest exporter of cement clinker based in Mumbai, India. The company is part
of the A.B. Group and division of Grasim Industries. It has an annual capacity
of 64 million tonnes. U.T. cement has been awarded the Superbrand status.
It manufactures and markets ordinary Portland cement, London blast furnace
slag cement, white cement and Portland Pozzolana cement. It also
manufactures ready-mix concrete (RMC) and Autoclaved Aerated Concrete
Blocks (AAC Blocks) with brand name U.T. Xtralite. The export markets span
countries around the Indian Ocean, Africa, Europe and the Middle East. U.T. is
India's largest exporter of cement clinker
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The company follows a retail format that caters to the end consumer providing
a variety of primary construction materials under one roof. Its production
facilities are spread across twelve integrated plants, one white cement plant,
one clinkerisation plant in UAE, sixteen grinding units, and five terminals
four in India and one in Sri Lanka. Export is a thrust area in the company's
strategy for growth. The company has a strong R&D department, which is a
boost for the company.

The recent development in the Indian economy is working as a boost for the
cement industry here. The finance ministers allocation of19,000 crore for
rural road development and sum allocation of 55,000 crore for roads and
highways in this year's fiscal budget is providing an upper edge to cement
industry to prosper.

Despite having a majority stake in Indian cement industry and presence of


favourable conditions to develop further, U.T. is facing some issues. The
marketing and promotional strategy of the company lacks behind. High value
of taxes imposed by the Indian government creates hindrance to compete with
foreign competitors. With the high incidence of government levies,
infrastructure constraints at ports and the regulatory policies of the
government providing encouragement for import of cement with nil custom
duty, the export of cement and clinker from India has been steadily and
continuously declining, causing a major problem to the company, since the
major revenue is earned by the export of cement. Adding to the fuel, Bokaro
officials are opposing the construction of on-going 1.5 Mt/yr cement plant,
causing more problems for U.T. cements.

Having strong market value in country like UAE and different parts of Africa
and Europe, the company is now looking into expanding its reach further in
foreign markets, but only restricted due to funds required to expand its foreign
base. U.T. wants to add range so to cater larger market needs, which can be
done through successful consolidation with Anhuoni Konch.

Estimated net revenue: US $3.7 billion


No. of employees: 15,155
Debt-equity ratio: 2.1:1
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OPTION 2: MERGER WITH HANDSOM CEMENT

HandSom plc (formerly HandSoo Trust plc) is a British-based international


building materials company, headquartered in Maidenhead. HandSom was
built up by James HandSom, later Lord HandSom, and Gordon White,
later Baron White of Hull, who set up HandSom Trust in 1964.Their policy was
to purchase underperforming assets and make them a source of profit.
HandSom and White were willing to take a wide range of measures to do so,
including mass redundancies, and therefore attracted opposition and
accusations that they were "asset strippers", but from 1979 the company was
successful from the shareholders' point of view and respected during the early
1980s, with HandSom (who gave millions of pounds to the Conservatives)
admired by Margaret Thatcher.

After 1983, the company acquired United Drapery Stores, which owned many
of Britain's most well-known high street clothes shops and department stores,
including John Collier, Richard Shops and the chain of Allders department
stores. Till 1999, acquired various companies from various sectors and then
the company finally acquired Pioneer International, an Australian building
materials business.

HandSom's two largest markets are the United Kingdom and the United States.
It is one of the world's leading producers of aggregates (particles of rock, gravel
and sand), and a major producer of bricks and concrete pipes. It also
produces ready-mixed concrete, asphalt, cement and cement related materials.
The annual turnover of the company is 112.5 mt/yr.

The company has a strong R&D department and has been successful in having
advancements in lubrication technology, especially in fully synthetic based
products. High quality, synthetic lubricants such as the Mobil SHC range
deliver advantages which mineral oils cannot match. Mobil SHV lubricants, for
example, can last up to six times longer and the upper operating limit is
typically higher than the maximum operating temperatures for high quality
mineral oils. It has also developed Mobil SHC 600 series- a high performance
gear oils, which can reduce the power consumption of some gear box
applications by up to 8% compared with mineral oils.

Due to Brexit, construction industry in UK are facing many challenges,


which would affect HandSom adversely; there are major downside risks to
growth in construction company, with little or no upside, the pace of growth in
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the UKs construction industry will slow to 1.5% in 2017 (down from 4%
previously), reflecting a sharp downturn in investment as the UK government
embarks on the two-year process of negotiating its exit from the single market.
Further problems are caused by the European Union Emissions Trading
System (EU ETS), which is trying to limit the pollution caused by various
industries, thus forcing many to shut their plants beyond a specific reach.
Many complaints by the residents of Padeswood (where the company has one of
its plant) of being affected by dust, are adding to the issues which HandSom is
dealing with currently.

The company now wants to tap other countries, especially the middle-east
regions, India, China etc. to not only decrease the production cost, but also to
delve into the advantages which other countries policies provide, in order to
expand in the future to cover up the current.

Estimated net revenue: US $7.59 billion


No. of employees: 26,000
Debt-equity ratio: 1.5:1

OPTION 3: VERTICAL MERGER WITH DEMEX

Demex S.A.B. de C.V., known as Demex, is a Mexican multinational building


materials company headquartered in San Pedro, near Monterrey, Mexico. It is a
non-metallic mineral product company which manufactures and
distributes cement,ready-mix concrete and aggregates in more than 20
countries, including Germany, UK, Malaysia etc. It is the second largest
building materials company worldwide, only after LafargeHolcim. Other
products which company manufacture include clay products, refractories, lime
and gypsum products, abrasives, etc.

Lorenzo Zambrano was the chairman and chief executive officer until his death
on May 12, 2014. About one-third of the company's sales come from its Mexico
operations, a quarter from its plants in the U.S., 15% from Spain, and smaller
percentages from its plants around the world.

Demex currently operates on two continents, with 30 cement plants, 500


ready-mix-concrete facilities, 50 quarries, 60 distribution centers and 20
marine terminals. The company's world headquarters are in San Pedro Garza
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Gracia, a city that is part of the Monterrey metropolitan area in
the northeastern Mexican state of Nuevo Len.

In the past, Demex has acquired companies like VENCEMOS, RMC Group and
Rinker Group Ltd. It is the Mexicos Monopolist, with a market share of 87.6%.
It has developed a number of educational and social responsibility initiatives,
such as- it instituted the Premio Demex, an annual award that recognizes
works in the fields of sustainability, accessibility, construction and
architecture. Also, it funds the Catedra Blanca, an honors architecture courses
in three universities: the ITESM, in Monterrey, the Universidad
Iberoamericana, in Mexico City, and the Barcelona School of Architecture. The
company, with strong R&D, is currently working to bring innovation in their
products and to make them more environment-friendly.

Over the years, they are facing difficulty to establish global relations, due to
language and cultural disparities. They have been accused of violating
environmental laws in the United States as well. Environmental watchdog
groups and the United States Environmental Protection Agency are threatening
to file suit claiming the company has committed numerous violations of the
Clean Air Act in Lyons, Colorado. During tests conducted, the Monterey Bay
(California) Unified Air Pollution Control District reported high levels of
chromium VI, also known as hexavalent chromium, a cancer causing chemical
agent, at an elementary school and fire department in Davenport, California.
Facing a cut-throat competition from foreign competitors, the business model
of the company still follows a conventional approach, which makes them lag
behind in the market. Adding to the fuel, the possibility of Trump winning the
American presidential elections can create more problems for Demex.

The company now wants to have international expansion to have more


exposure. They are working to diversify its product to reach a larger mass;
currently needs a business model innovation that builds solution to their
customers. After a successful merger with Anhuoni Konch, the company can
accomplish the future goals they have set.

Estimated net revenue: US $10.9 billion


No. of employees: 29,000
Debt-equity ratio: 1.5:1
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