ACC Ltd and Ambuja Cements Ltd, both controlled by LafargeHolcim Ltd, said they were putting on hold their proposed merger, citing constraints related to transfer of mines under current laws. The merger, which would have potentially created India’s second largest cement maker, still remains the “ultimate objective”, the companies said.

“The current regime on transfer of mineral concessions is still evolving and does not provide for a merger currently,” a spokesperson for ACC said in an emailed response to a query. “Given the challenges of achieving such transfers across 18-20 states, it was found prudent not to pursue the same at this point of time.”

For now, ACC and Ambuja said that their boards have approved an arrangement to work with each other for mutual purchase and sale of services to maximize synergies and unlock value for shareholders.

In May 2017, the boards of the two companies agreed to evaluate a potential ACC-Ambuja merger “with a view to combine the strengths of both businesses”. A special committee, comprising largely of independent directors, was formed to begin the evaluation, ACC and Ambuja Cements had said.

“On the basis of a comprehensive evaluation carried out by both the Special Committee and the board of directors of the company, the company is of the opinion that there are at present certain constraints in implementing a merger between the company and ACL,” ACC said in a filing on Monday.

“The company is therefore not proceeding with the merger at this juncture, though this remains the ultimate objective,” ACC added in the filing.

ACC also said that it will come out with details about maximizing synergies and unlocking value for investors through a notice for postal ballot.

Ambuja Cements holds about a 50% stake in ACC, while LafargeHolcim owns a 4.48% stake through its unit Holderind Investments Ltd, according to data from Bloomberg. Holderind holds about 63.56% in Ambuja Cement.

According to Rohit Natarajan, an analyst with IDBI Capital, investors were not convinced about the rationale of the proposed ACC-Ambuja merger.

“If EV/tonne is any benchmark to go by, ACC was cheaper than Ambuja. There are two perspectives to play the spread here: first, there will be a favourable exchange ratio, implying a merger arbitrage for ACC holders. Second, Ambuja could buy ACC at a less favourable rate, implying a gain for Ambuja holders. Either ways, both trades knock off with the latest event. However, with ACC management maintaining merger as the ultimate objective, we will be revisiting the script again,” Natarajan said.

An email sent to an Ambuja spokesperson for comments remained unanswered. An email sent to a LafargeHolcim spokesperson remained unanswered.

The cement sector has seen several mergers and acquisitions in the past two years, signalling consolidation. In July 2016, Gujarat-based soap and detergent maker Nirma Ltd announced the acquisition of Lafarge India’s cement assets for $1.4 billion. In August that year, Reliance Infrastructure Ltd sold its cement business to Kolkata-based Birla Corp. Ltd, the flagship company of the MP Birla Group, for Rs4,800 crore. Last year, UltraTech Cement Ltd paid Rs16,189 crore to acquire the cement business of Jaiprakash Associates.

Opting for inorganic growth or a brownfield expansion is both time- and cost-efficient for cement makers. With cement demand across the country yet to recover, smaller companies have been forced to find refuge with their larger rivals.

According to a 31 January report by Nirmal Bang Institutional Securities, there were early signs of demand recovery, although prices continued to remain soft.

“A few areas (such as Bihar has been) impacted severely by non-availability of construction material (sand) continued to witness listless demand. The demand is expected largely from the government-led infrastructure segment, although certain pockets in western and southern regions showed softening of severity of the lull in real estate sector,” Nirmal Bang said.