A CASE OF DE-MERGER OF ULTRATECH CEMENT BY L&T LTD. & ITS ACQUISITION BY GRASIM.

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HISTORY OF DE-MERGER

Takeover battle between Grasim and L&T lead to demerger.

This battle had its roots from earlier 1980s takeover battle of L&T & RIL. It may be sufficient to say that RIL could not manage to get support from the government, public at large and financial institutions.

The largest shareholders of L&T were financial institutions which collectively held 40 percent stake in L&T. LIC and UTI held approx. 27 percent and the rest was held by other FIs. FIs backed L&T management and RIL had to step back.

On November 18, 2001, RIL sold its stake of 10.05% to Grasim, an A.V.Birla Group for Rs. 766.5 crores. Grasim paid Rs. 306.6 per share which was 46% higher than its original market price. Thereafter an investment company subsidiary to Grasim acquired another 4.48% stake which lead to 14.53% stake of Grasim in L&T.

On October 13, 2002, Grasim made an open offer to acquire 20% stake in L&T at Rs. 190 per share. This offer miserably failed after few legal allegations against Grasim. It could only collect only 0.38% stake.

In December 2002 L&T carved out its cement business into an subsidiary company.

With 15.73% stake in L&T, Grasim & L&T hammered out a deal to carry out a structured de-merger of cement business of L&T in June 2003.

DE-MERGER DEAL   With effect from April 1, 2003, the cement business of L&T was vested

in a separate company (Ultratech Cement Limited). It was decided that post de-merger, Grasim will acquire the control of the resultant cement company. However, L&T managed to retain certain key assets like L&T brand, ready mix cement (RMC) business, the gas power plant in Andhra Pradesh, and the entire residential and office property of the cement division.

As per the demerger deal, the stake of L&T would be 11.5%, while that of Grasim would be 21%. Remaining was allotted to the shareholders of L&T for every 5 of 2 shares of ultratech cement ltd. Grasim would then make an open offer for 30 percent of the Ultratech equity at the same price and would take its stake to 51 per cent.

The open offer by Grasim was meant for not only taking control of Ultratech, but to give a chance to FIs to bring down their stake, in the process making hefty capital gains. In subsequent developments, Grasim bought L&T’s stake actually at Rs. 342.60 per share and made an open offer at the same price. Grasim, thus, had to shell out Rs. 362 crores to L&T and Rs. 1298 crores in the open offer.

GRASIM’S MOTIVE As on 31st March 2003, the total cement capacity in India was approx. 135

mn tonnes. L&T had the largest capacity of 18mn tonnes, followed by ACC at 15 nm tonnes, Grasim at 13 mn tonnes and Gujarat Ambuja at 12.5 mn tonnes. In acquiring L&T’s cement business, Birlas had a simple motive of ‘growth through acquisition’. After acquisition the combined capacity of Grasim and Ultratech went up to 31 mn 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. Grasim managed to transfer brand equity of ‘L&T cement’ to ‘Ultratech cement’.

  While Grasim was strong in the Southern markets, L&T was strong in the

rest of India. L&T’s strong distribution network was very vital to Grasim to push its own brands also.

WHY L&T SURRENDERED

The first and foremost reason was survival. At the time RIL tried to takeover L&T, FIs had backed L&T management to control over L&T. Birlas had succeeded in convincing FIs about the structured vertical de-merger and about FIs selling their shares in the resultant cement company either directly or through open offer. Also, now Birlas could up their stake in L&T through either creeping acquisition or through another open offer. So in order to keep their control over L&T, which by then was a ten thousand crore empire even sans cement, L&T management had no choice but to agree to give away the cement business.

L&T management also used de-merger to strengthen L&T balance sheet.

In de-merger, L&T’s paid up capital was reduced to 10 percent of what it was prior to de-merger. The number of equity shares was reduced to half and face value to one fifth. This resulted into EPS shooting up.