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Takeover and defense strategies of Grasim and L&T

Larsen & Toubro (L&T) had sold its complete stake of 11.49 per cent in Ultratech Cement in the open market. According to a statement issued by L&T, the sale was carried out at an average price of around Rs. 725 per share. L&T had exited its cement business through a demerger and sale to Grasim, an Aditya Birla group company in 2004, and had retained the 11.49 per cent stake in Ultratech with a commitment to sell the stake on or before December 31, 2009. The stake sale is in accordance with L&Ts obligations under its agreement with Grasim and is also in line with L&Ts strategy of focusing on its core business. PTI reports: Calculated on the basis of current market price of Ultratech Cement, the transaction value comes to over Rs. 1,035.70 crore. Meanwhile, shares of Ultratech Cement reacted negatively to the development and plunged over five per cent in the morning trade on the BSE. The companys scrip dipped to a low of Rs. 724.10, down 5.12 per cent over previous close. The demerger was a three-step process as follows:

In the first phase, L&T would hive off the cement business into a separate company, Ultra Tech CemCo, where it will hold 20 per cent. The balance 80 per cent will be held by the existing L&T shareholders proportionately. In the second phase, Grasim will buy 8.5 per cent in CemCo from L&T at Rs 342.60 per share and make an open offer for another 30 per cent at the same price. If fully subscribed, the open offer will make the Aditya Birla group's (Grasim) holding in CemCo to 51 per cent and L&T will realise Rs 362 crore on sale of its stake in Ultra Tech CemCo. In the third phase, L&T Employee Welfare Foundation will acquire the Birla's 15.3 per cent stake in the residual engineering company for Rs. 446.40 crore

The Demerger ratio As per the Demerger ratio for every 2 shares (of face value Rs 10) held in L&T, the shareholder was given 1 share (face value Rs 2) in the New L&T. At the same time for every 5 shares held in L&T, the shareholder was given 2 shares in the demerged cement company Ultra Tech Cement Co. Grasim had made a successful open offer bid for 30 per cent of the equity of UltraTech with a view of taking management control. Concurrently, Grasim acquired 8.5 per cent equity stake of UltraTech from L&T, and Grasim and its associates have sold 14.95 per cent of their holding in the demerged L&T to the L&T Employee Welfare Foundation. The transaction is expected to provide UltraTech an opportunity to leverage synergies with Grasim and strengthen their ability to compete in the Indian and overseas markets.

Benefit derived by the L&T management through the negotiation with Birla
Birlas had a simple motive of growth through acquisition. After acquisition the combined capacity of Grasim and UltraTech went up to 31mn tonnes, making Grasim the largest producer in India and the eighth largest in the world. L&T was also considered as a premium brand and used to fetch higher price. Though this brand would not be available to Grasim in the long run, L&T allowed Grasim to use it for more than a year post acquisition.
While

Grasim was strong in the Southern markets, L&T was strong in the rest of India. L&T strong distribution network was very vital to Grasim to push its own brands also. Around 2002-03, the economy had just started coming out of woods. Stock markets were still bearish and valuations low. In 2003-04, the first post demerger year, on the gross turnover of Rs. 2700 crore, UltraTech posted a PBT of just Rs. 49.20 crore.

L&T grew by 32 percent in 2003-04, engineering division turnover in 2002-03 would have been around Rs. 7500 crore and that of cement division around Rs. 2000-2100 crore. Cement division must have made losses in 2002-03.

The real winner, why?

L&T management did a very good job of negotiating. They managed to retain ready mix cement business and other key assets of the cement division as stated earlier. They also managed to allot to L&T 20 percent of the new company equity and sold 8.5 percent stake at a whopping Rs. 362 crore. Considering that the first offer of Birlas was for Rs. 130/- per share of Cement Company (including RMC business and all assets), the price of Rs. 346.60 per share was extremely good at that time. They also got for themselves time upto 2009 to sell the balance 11.5 percent. Considering that during October 2007, UltraTech share crossed Rs. 1100/-, this was a very good negotiation on behalf of L&T management. Also they made Birlas sell approx. 14.95 percent stake at Rs. 120/- per share to employees welfare trust, in the process achieving two things getting Birlas off their backs permanently and increasing their own stake without having to shell out any money from their own pockets. All in all the deal had a lot of positives for L&T and its management. However, a look at the performance of UltraTech for the year 2007-08 will show that the real winners were Birlas and not L&T.