L&T Demerger


Published on

L&T cement demerged & acquired by Grasim.

Published in: Economy & Finance
No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

L&T Demerger

  2. 2. AMITY INTERNATIONAL BUSINESS SCHOOL <ul><ul><li>India is second largest cement producer in the world after China. </li></ul></ul><ul><ul><li>Capacity of 151.2 Million Tones (MT) </li></ul></ul><ul><ul><li>Dominated by around 20 companies, 70% of the total cement production, over 129 plants, owned by 54major companies across the nation. </li></ul></ul><ul><ul><li>Highly fragmented oligopolistic industry supported by technology up gradation & low entry barriers to market. </li></ul></ul><ul><ul><li>India falls in the list of lowest per capita consumption of cement with 125 kgs compared to world average of 270 kgs. </li></ul></ul><ul><ul><li>Lower demand but surplus production. </li></ul></ul><ul><ul><li>Opportunities for foreign players to acquire domestic companies instead of Greenfield ventures. </li></ul></ul>INDIAN CEMENT INDUSTRY
  3. 3. AMITY INTERNATIONAL BUSINESS SCHOOL <ul><ul><li>Industry growth raised up to 10% (FY10) </li></ul></ul>INDIAN CEMENT INDUSTRY Source : http://business.mapsofindia.com/cement/
  4. 4. AMITY INTERNATIONAL BUSINESS SCHOOL GRASIM’S PRE-ACQUISITION PHASE <ul><ul><li>Flagship Company of Aditya Birla group, ₹ 5,233.3 Cr. (2003-04). </li></ul></ul><ul><ul><li>Started operations in 1948 as textile manufacturer. </li></ul></ul><ul><ul><li>Today operates in </li></ul></ul><ul><ul><ul><li>Viscose Staple Fiber (Global Share 24%, Domestic Share 98%). </li></ul></ul></ul><ul><ul><ul><li>Sponge Iron (Largest Merchant Producer). </li></ul></ul></ul><ul><ul><ul><li>Chemicals (India’s 2 nd largest caustic Soda unit). </li></ul></ul></ul><ul><ul><ul><li>Textiles (a premium brand with Graviera). </li></ul></ul></ul><ul><ul><li>Cement Business: </li></ul></ul><ul><ul><ul><li>Vikram Cement. </li></ul></ul></ul><ul><ul><ul><li>Grasim Cement. </li></ul></ul></ul><ul><ul><ul><li>Aditya Cement. </li></ul></ul></ul><ul><ul><ul><li>Rajashree Cement. </li></ul></ul></ul><ul><ul><ul><li>Grasim South. </li></ul></ul></ul><ul><ul><ul><li>White Cement Division ( Birla White ). ( Refer to page number 96-97 ) </li></ul></ul></ul>
  5. 5. AMITY INTERNATIONAL BUSINESS SCHOOL <ul><ul><li>Larsen & Toubro Ltd. – the country’s largest engineering & construction conglomerate. </li></ul></ul><ul><ul><li>Cement Business: </li></ul></ul><ul><ul><ul><li>Covered most of South & Middle east, handful of plants in North. </li></ul></ul></ul><ul><ul><ul><li>Sold 13.32 million tons & exported 2.76 million tons (FY 20002-03). </li></ul></ul></ul><ul><ul><ul><li>Demand & supply mismatch – low price realization but better logistic management kept L&T competitive. </li></ul></ul></ul><ul><ul><li>Competitive advantage - quality, international presence, customer focus, brand. </li></ul></ul>L&T GROUP BEFORE DEMERGER
  6. 6. AMITY INTERNATIONAL BUSINESS SCHOOL HISTORY OF THE TAKEOVER BATTLE <ul><ul><li>Battle between Grasim and L&T had its roots in early nineties. </li></ul></ul><ul><ul><li>In the late 1980s, Reliance Industries Limited (RIL) had acquired 10.05 % stake in L&T. </li></ul></ul><ul><ul><li>RIL was aspiring to acquire L&T as a whole, and not just its cement business. </li></ul></ul><ul><ul><li>For L&T management – a fear of loosing control, freedom & probably the jobs. </li></ul></ul><ul><ul><li>L&T fought back tooth and nail and managed to successfully ward of RIL attack. </li></ul></ul><ul><ul><li>RIL could not manage to get support from the government, public at large and financial institutions. </li></ul></ul><ul><ul><li>Largest shareholders of L&T were financial institutions which collectively held 40 % stake in L&T(LIC and UTI held approx. 27 %) </li></ul></ul><ul><ul><li>FIs backed L&T management and RIL had to step back. </li></ul></ul>
  7. 7. AMITY INTERNATIONAL BUSINESS SCHOOL MAIN STORY Date Main Proceedings November 18, 2001 <ul><li>RIL sold its entire 10.05 % stake (25000000 equity shares) to Grasim, an A.V. Birla group company for ₹ 766.5 crore @ ₹ 306.6, 46 %higher than market price @ ₹ 208 – 210/share. </li></ul><ul><li>Thereafter, Grasim acquired another 4.48% stake (1.112 crore equity shares) @ ₹ 176.75 per share taking Grasim’s stake to 14.53 %. </li></ul>October 13, 2002 <ul><li>Public announcement of open offer by Grasim to acquire 20% stake (4.973 crore shares) in </li></ul><ul><li>L&T @ ₹ 190/share. </li></ul>October 24, 2002 <ul><li>Grasim filed the draft letter of offer with the SEBI. </li></ul>November 8, 2002 <ul><li>SEBI found alleged violation of takeover regulations in regard to Grasim acquisition of 10.05% stake form RIL. </li></ul><ul><li>SEBI asked merchant bankers JP MORGAN STANLEY not to proceed with open offer </li></ul>November 18, 2002 <ul><li>Appeal the Securities Appellate Tribunal (SAT) against the SEBI order </li></ul>November 20, 2002 <ul><li>Gave a public notice to that effect. Thereafter the investigation by the SEBI went on till almost third week of April 2003. </li></ul>December 2002 <ul><li>L&T tried to outsmart Grasim by proposal to carve out its cement business into a subsidiary. </li></ul><ul><li>Wherein L&T would have retained around 75 % stake and 25 % with the shareholders. </li></ul><ul><li>Brought down Grasim’s direct stake to about 3.75 % as against its 14.53 % stake in L&T. </li></ul><ul><li>Grasim managed to get a stay from the court on this proposed de-merger. </li></ul>January 27, 2003 <ul><li>Grasim made a counter proposal of vertical de-merger of cement business to L&T board. </li></ul><ul><li>Grasim valued L&T’s cement business at ₹ 130/share & other businesses @ ₹ 162.5/share thereby valuing L&T as a whole at ₹ 292.5 per share. </li></ul><ul><li>Grasim proposed an open offer after demerger to acquire control over L&T cement division. </li></ul>
  8. 8. AMITY INTERNATIONAL BUSINESS SCHOOL MAIN STORY Source : http://www.managementparadise.com/article.php?article_id=23 / Date Main Proceedings April 2003 <ul><li>SEBI came to conclusion that Grasim had not violated Takeover Code, </li></ul><ul><li>Offer was valid subject to making some additional disclosures </li></ul>April 22, 2003 <ul><li>The SEBI then offered its comments to the draft letter of offer of Grasim . </li></ul>May 7, 2003 <ul><li>Finally Grasim’s open offer for L&T’s 20 % stake </li></ul>June 5, 2003 <ul><li>Offer Closed. </li></ul><ul><li>Grasim, accordingly, withdrew its appeal before Securities Appellate Tribunal (SAT). </li></ul><ul><li>The offer failed miserably. </li></ul><ul><li>Grasim could get only 9.44 lac shares or 0.38% stake in the open offer. </li></ul><ul><li>However, post announcement of open offer, through its subsidiary purchased another 20.56 </li></ul><ul><li>lac shares or 0.83% stake from the open market </li></ul><ul><li>Thereby taking its total holding to 15.73 % of L&T’s equity capital. </li></ul><ul><li>This paved way for Grasim to make creeping acquisition without making an open offer as also </li></ul><ul><li>to get board seats on L&T’s board. </li></ul>June 2003 <ul><li>L&T management and Birlas hammered out a deal to carry out a structured de-merger of </li></ul><ul><li>cement business of L&T. </li></ul><ul><li>Further terms and conditions of Grasim’s takeover of control of the resultant cement company. </li></ul>
  9. 9. AMITY INTERNATIONAL BUSINESS SCHOOL THE DEMERGER DEAL – KEY POINTS <ul><ul><li>It was decided that post de-merger, Grasim will acquire the control of the resultant cement company. </li></ul></ul><ul><ul><li>However, L&T managed to retain certain key assets like L&T brand, ready mix cement (RMC) business & and the entire residential and office property of the cement division. </li></ul></ul><ul><ul><li>L&T’s equity capital of Rs, 248.67 crore, consisting of approx. 24.88 crore shares of ₹ 10 each was reduced. </li></ul></ul><ul><ul><li>L&T’s paid up capital was brought down to ₹ 24.88 crores from ₹ 248.67 crore (24.88 shares @ ₹ 10) consisting of 12.44 crore shares of ₹ 2 each. </li></ul></ul><ul><ul><li>Accordingly shareholders of L&T received one share of ₹ 2 face value of new L&T for every two shares of ₹ 10 face value of old L&T. </li></ul></ul><ul><ul><li>UltraTech paid up capital was fixed at ₹ 124.91 crores consisting of approx. 12.49 crore shares of ₹ 10 face value. </li></ul></ul>
  10. 10. AMITY INTERNATIONAL BUSINESS SCHOOL THE DEMERGER DEAL – KEY POINTS <ul><ul><li>L&T was allotted 20 % of UlraTech’s equity. </li></ul></ul><ul><ul><li>The remaining 80 % was allotted to shareholders of L&T in the same proportion as the stake held by them i.e. 2 shares of UltraTech for 5 shares in L&T. </li></ul></ul><ul><ul><li>With this Grasim would receive approx. 12.5 % stake in UltraTech against its 15.73 %stake in L&T. </li></ul></ul><ul><ul><li>Out of L&T's 20 % stake in Ultra Tech, L&T will sell 8.5 % stake to Grasim @ ₹ 171.30/share as against the earlier offer of Grasim @ ₹ 130/share. </li></ul></ul><ul><ul><li>With this, Grasim will hold approx. 21 % in UltraTech. </li></ul></ul><ul><ul><li>Grasim would then make an open offer for 30 % of the UlraTech's equity at the same price and would take its stake to 51 per cent. </li></ul></ul><ul><ul><li>Grasim sold approx. 14.93 % of its 15.73 % stake in L&T to an employee's trust of L&T at ₹ 120/pre de-merger share or ₹ 240/post de-merger share. </li></ul></ul>
  11. 11. AMITY INTERNATIONAL BUSINESS SCHOOL BIRLA’S MOTIVE <ul><ul><li>L&T had the largest capacity of 18mn tonnes, followed by ACC at 15 nm tonnes, </li></ul></ul><ul><ul><li>Birlas had a simple motive of ‘growth through acquisition’. </li></ul></ul><ul><ul><li>After acquisition the combined capacity of Grasim and UltraTech went up making Grasim the largest producer in India and the eighth largest in the world. </li></ul></ul><ul><ul><li>L&T was a premium brand and used to fetch higher price. </li></ul></ul><ul><ul><li>Grasim was strong in the Southern markets, L&T was strong in the rest of India. </li></ul></ul><ul><ul><li>L&T’s strong distribution network – reduction in maintenance cost. </li></ul></ul><ul><ul><li>Cement industry profitable growth. </li></ul></ul>
  12. 12. L&T’s SURRENDER - A STRATEGIC MOVE? <ul><ul><li>L&T core strength – Engineering not the cement. </li></ul></ul><ul><ul><li>In Cement investment of ₹ 5,000 cr . </li></ul></ul><ul><ul><li>According to BCG, if 10% growth a year will need additional capacity of 1.5 million tons @ cost of ₹ 500 cr a year. </li></ul></ul><ul><ul><li>Couldn’t afford more investments as ROI was lower than Cost of capital. </li></ul></ul><ul><ul><li>Survival - FIs were willing to sell their stake in L&T to Birlas provided the price was ‘right’. </li></ul></ul><ul><ul><li>L&T management had no choice but to agree to give away the cement business. </li></ul></ul>AMITY INTERNATIONAL BUSINESS SCHOOL
  13. 13. <ul><ul><li>A STRATEGIC MOVE </li></ul></ul><ul><ul><li>L&T managed to retain ready mix cement business and other key assets of the cement division. </li></ul></ul><ul><ul><li>20% of the new company’s equity and sold 8.5%stake at a whopping ₹ 362 crore. </li></ul></ul><ul><ul><li>The price of ₹ 346.60 /share was extremely good against first offer of Birlas for ₹ 130/share of cement company </li></ul></ul><ul><ul><li>During October 2007, UltraTech share crossed ₹ 1100, this was a very good negotiation on behalf of L&T management. </li></ul></ul><ul><ul><li>Also they made Birlas sell approx. 14.95% stake @ ₹ 120/share to employees’ welfare trust - increasing their own stake without having to shell out any money from their own pockets. </li></ul></ul><ul><ul><li>Strengthen L&T balance sheet as the number of equity shares was reduced to half and face value to one fifth. This resulted into EPS shooting up. </li></ul></ul>AMITY INTERNATIONAL BUSINESS SCHOOL
  15. 15. MERGERS AND ACQUISITIONS IN CEMENT INDUSTRY IN INDIA <ul><li>UltraTech Cement is going to absorb its sister concern Samruddhi Cement to become biggest cement company in India. </li></ul><ul><li>World's leading foreign funds like HSBC, ABN Amro, Fidelity, Emerging Market Fund and Asset Management Fund have together bought 7.5% of India Cements (ICL) at a cost of US$ 124.91 million. </li></ul><ul><li>Cimpor, a Cement company of Portugal, has bought 53.63% stake that Grasim Industries had in Shree Digvijay Cement. </li></ul><ul><li>French cement company Vicat SA bought 6.67% share of Sagar Cement at a cost of US$ 14.35 million. </li></ul><ul><li>Holcim now holds 56% stake of Ambuja Cement. Previously it held 22% of stake. The company utilized various open market transactions to increase its stakes. It invested US$ 1.8 billion for that. </li></ul>AMITY INTERNATIONAL BUSINESS SCHOOL