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What factors motivated Grasim to acquire RILs stake in L&T at a hefty premium? Was the open offer price of Grasim Reasonable?
What are the options before L&T Shareholders? Will the proposed acquisition change the industry dynamics?
How will you justify the role of various stakeholders in the episode?
Determinants of Value
Return Growth Cash Flow
Company Value
Managerial Dimension
Financial Dimension
Redeploy capital Increase ROI
Risk Dimension
Cost of capital reduction
Value Creation
Operational Dimension
Scale Economics Improve margins
Release Value
Market Valuation
De-merger
Placing Value in the Shareholders Hands
De-merger Concept
Shareholders
Shares
Company AB
Business A Business B
De-merge
Company B
Business B
Post De-merger
Shareholders Shares
Company AB
Business A
Company B
165.6
71.1 Apple 124.4
TOTAL
Aptech
94.5
Apple(Finance)
Per Share Purchase of L&T from RIL (at 47% premium) on Nov.18, 2001 Purchase of L&T from Open Market
306.6 166.5
October 14, 2002: Open offer for 20% equity of L&T at Rs 190 per share (at 10% premium) Shareholding Pattern of L&T at the end of September 2002 LIC (18.6% stake): offer price lower than the intrinsic value
26.53%
Grasim
14.15%
11.98%
Indian Public
31.68%
6.35%
NRIs
0.75%
18.08%
Others
4.63%
Price was not beneficial to the shareholders of L&T Worried over losing control over the company Approached FIs to oppose the open offer L&T Valuation at close to Rs 300 a share
(Business Standard, November 15, 2002)
Largely fragmented with an installed capacity of 130 MTPA as on March 31, 2002 120 cement plants & 54 companies L&T: 16 MTPA Grasim Industries: 12.9 MTPA Ambuja Group: 12.5 MTPA ACC: 14.93 MTPA High leverage, debt-to-equity ratio of 2.32:1
Cluster that consume 42% of total cement Grasim & L&T combine will be number 1 L&T Plants have low costs per ton of cement Better logistics and inventory management
70% stake with L&T 25% stake with L&T shareholders 5% stake with CDC Capital Partners $75 per ton or Rs 156-158 per share
Valuation Methodologies
= Purchase price per share / Targets fully diluted EPS before extra-ordinary items = Purchase price per share / Targets fully diluted CFPS before extra-ordinary items
=(Aggregate purchase price of equity + Market value of debt assumed) / Targets EBIT before extra-ordinary items =(Aggregate purchase price of equity + Market value of debt assumed) / Targets EBITDA before extra-ordinary items
= Purchase price per share / Targets book value per common share = (Purchase price per share - Targets share price pre-merger)/ Targets share price premerger
Premium paid
= (Aggregate purchase price of equity + Market value of debt assumed) / Replacement cost of targets assets
Three-Step Process
L&T hive-off Cement business into a separate company Ultra Tech CemCo where it will hold 20% stake; balance 80% held by the L&T shareholders proportionately Grasim would buy 8.5% in Ultra Tech CemCo from L&T at Rs 171.30 per share and make an open offer for another 30%
L&T Employee Welfare Foundation will acquire Grasims 15.3% stake in the residual engineering company
Demerger ratio
For every 2 shares (of face value of Rs 10) held in L&T, the shareholders were given 1 share (face value Rs 2) in the new L&T For every 5 shares held in L&T, the shareholders were given 2 shares in the demerged cement company Ultra Tech CemCo
Sale @ Rs 120 Grasim 14.86% Samrudhi 0.87% Others 84.27% Restructuring 1:2 De-merged Company L&T Trust 15.7% Others 84.27%
Shareholders of L&T
Shares 2:5*
Pre-open offer Ultra Tech CemCo Ltd Grasim 12.6% L&T 20% Others 67.4% Open Offer Buyer Grasim Grasim Total Seller L&T Others % 8.5 30 38.5 Cost 362 cr 1278 cr 1640
Net Outflow
% share Per Share Purchase of L&T from Reliance Ind Purchase of L&T from Open Market Purchase of CemCo from L&T Open Offer for CemCO Sale of shares in existing L&T Net Outflow 10.05 5.65 8.5 30 15.7 307 167 171 171 120 Cost Total (Rs/Cr) 776 234 362 1,278 (468) 2,182