L&T: Restructuring

the Cement Business

Case Presentation

Mergers & Acquisitions Course

Group 2
Manish Tiwari
VVB Satyanarayana
Neelam Kumari
Parina Kohle
Shwetank Malik
Goutham Rokkam
S. Pranavi

(M101-15)
(M059-15)
(M033-15)
(M038-15)
(M054-15)
(M044-15)
(M119-15)

L&T

Highly diversified conglomerate

The cement division was Indias largest cement producer with a

manufacturing capacity of 16 MTPA (Western & Southern India)

Three major business segments engineering and construction,

electrical business group and cement

Grasim

Started operations as textile then later backward integrated and

diversified into sponge and iron industry
Third largest player in Cement Industry (2002)

A V Birla Group
Leadership of Kumar Mangalam Birla
Strategy to diversify into capital intensive, commodity

businesses to raise funds and keep costs low.

The L& T stake acquisition by the group had investments of more
than 20 billion
Family owned conglomerate : limited decentralization of power
with long term decisions in various businesses being taken at
group headquarter

Industry Structure

In India the cement industry was growing at a faster rate than world average
There were large number of firms but was unable to maintain prices at a level that
was consistent with sustained high profitability
Limestone was a main raw material and 1.42 ton of limestone was required per ton of
cement.
Limestone accounted for around 5-7% of total cost of sales of cement
Industry was characterized by high leverage with average debt-equity ratio of 2.32
with a growth rate of 6.8%
Fragmented structure due to low entry to barrier
Consolidation of industry was happening

History
On November 18, 2001 Grasim bought 10.05% of L&T stock at 306.6 with total investment

of 7.66 billion
Paid premium 47%, last traded price 208.5
Grasims stake <15%, hence did not make open offer to purchase additional shares
Grasim started to gain control over L&T management and by September, 2002 it had
increased its holdings to 14.15% through open market purchase at avg price of 184.13
On Oct 14, 2002 Grasim announced an open offer for 20% of L&T stock at an offer price of
Rs. 190 per share. (Price at a premium of 10% LTP(172.08))
Legal notices seeking prosecution of SEBI and FIs for alleged failure to protect the interests
of small investors in L&Ts open offer case.
L&T management maintained that the offer price was not beneficial to shareholders of L&T.
(L&T valued at least 40% higher than Grasims open offer price)
Birla justified that the Grasim had paid premium initially to enter the company and the offer
price was intended to bring down their average holding cost.

De-merger Proposal
CDC approached with 15% stake in demerged cement
division
L&T aggressively discussed demerger issue to make it
unattractive for Grasim & leave it
According to the plan, L&T would hold 70% & 25% by
existing share holders , 5% to CDC Capital Partners
CDC finally agreed to pick up 6.8% stake

BIRLAs Objection
Birlas preferred vertical split
Birlas approached FIs by which second offer was made with 75$/ton
& 20% of the new company instead of 6.8%
Vertical demerger would provide with liquidity

L&T FAVOURED COMPETITIVE BIDDING

L&T preferred competitive bidding as it opposes Birlas vertical
demerger
It would be unfair to L&T shareholders if it was decided from Grasim
Grasims opposition to CDC proposal gained sympathy from L&T
board

SEBI
SEBI considered two situations:
a) When allegations of insider trading were raised against Reliance in Nov 2001
b) When open offer of Grasim was announced
SEBI found many irregularities on part of Reliance in the disclosures to stock
exchanges
SAT to investigate open offer
SEBI officials also sought to examine L&T board meeting details after two Birla
nominees were inducted on the companys board.
Critical dilemma of whether to tender to the open offer.

Should L&T spin-off its cement business? Why (not)?

Yes. It should spin-off the cement business. Reasons:

Financial:

Current share price of L&T (as per the case data): Rs.174.80
Share price of L&T without cement business (not considering others):
Rs.195.82

Strategic:

Aditya Birla groups aggressive move to takeover L&T to expand its cement
business

Unlocks value for both the demerged entities (Value of both demerged
entities comes to Rs.292 as per Grasims evealuation)

Does it make sense for Grasim to acquire L&T?Why (not)?

No! The reasons for the same are:
Investing in non-core business doesnt makes sense
AV Birla Groups focus on three principal commodities cement,
aluminum & apparel; already gained leadership in the other
industries (aluminum and apparel) via major acquisitions (like
INDAL, Madura Coats, etc.)
To gain leadership in cement, acquiring whole of L&T
(encompassing ECC and EBG segments as well) doesnt makes
sense (65% revenues coming from ECC & EBG)

Though the vertical de-merger and then acquisition of the cement segment
has significant value enhancing potential, both strategic and operational

Strategic Gains
Leading force in key growth sector
Become Indias largest cement
manufacturer (~25% mkt share &
22% capacity 29 mn tonnes) and
worlds 7th largest
Combined entity to have
considerable presence in western &
southern markets (cluster that
consumes 42% of total cement),
thus, greater pricing power; price
growth rate of 2% against the
stipulated current rate of 1%
Merger would allow cross-branding;
L&Ts strong brand equity (its
products command higher price)
will help Grasim enter the premium

Operational Gains

Operational Synergies
Economies of scale resulting from
larger size of operations
(expected annual cost savings of
Rs. 1 billion)

Logistical advantages (freight

costs) in manufacturing and
catering to different markets,
sale to markets nearer to the
plants (logistics), reduced lead
distance

Strong distribution network of

L&T vital to Grasim to push its
own brand also

Enhanced financial flexibility ability to redeploy capital

Thank You!