DEMERGER OF ULTRA

TECH CEMENT BY L&T

AND ITS
ACQUISITION BY
GRASIM
GRASIM WAS BADLY
AFTER L&T

WHY?
 ANSWER
As on 31st march, 2003 cement capacity:
in million tonnes
1. In India : 135
2. L&T : 18 (13.3%)
3. ACC ltd. : 15 (11.1%)
4. Grasim : 13 (9.6% )
5. Gujrat Ambuja : 12.5 (9.3%)
43.3%
Grasim wanted to acquire only L&T. Its root
cause is in another story.
1. L&T’s 10.05% stake was with RIL which is a big
chunk. RIL was ready to sell.
2. RIL acquired it in late 1980’s with a hope to
acquire L&T as a whole as L&T had been a
thoroughly managed company and its core
competence was turnkey engineering
projects.
3. L&T fitted very well in RIL’s plan to set up mega
projects one after another.
 Why RIL wanted to sell?
• RIL could not manage to get support from the
govt., public at large or FI’s.
• Largest shareholders of L&T were FI’s who
held 40% stake collectively out of which 27%
was held by LIC and UTI.
• Therefore FI’s backed L&T management and
RIL had to step back.
 The main story
STEP 1: Acquired 10.05% stake from RIL.
STEP 2: Acquired 4.48% stake through subsidiary
STEP 3: Open offer after more than 6 months.
STEP 4: Delay in open offer.
STEP 5: Proposal by L&T
STEP 6: Counter proposal by Grasim
STEP 7: SEBI’s approval.
STEP 8: Structured demerger deal
 STEP 1
Acquired 10.05% stake from RIL
• 18 Nov, 2001
Grasim acquired this stake at 46% higher rates
@Rs 306.6 per share.
 STEP 2:
Acquired 4.48% stake through subsidiary

• Thereafter Grasim acquired 4.48% stake of

L&T through an investment Co. that was a
subsidiary of Grasim @Rs176.75 per share.
 STEP 3:
Open offer after more than 6 months.

• 13 Oct,2002
Grasim made a public announcement of an
open offer of 20% stake in L&T after more
than 6 months @Rs 190 per share.
 STEP 4
Delay in open offer.

• 24 Oct, 2002
Grasim filed the draft letter of offer with SEBI.
• 8 Nov, 2002
SEBI alleged violation of takeover regulations
with regard to acquisition of 10.05% stake
from RIL.
• 18 Nov, 2002
Grasim appealed to SAT against SEBI.
 STEP 5
Proposal by L&T
• Dec 2002
Proposal to carve out its cement business into
a subsidiary wherein:
a. L&T would have retained 75% stake
b. Shareholders of L&T would have got
balance 25%
• Grasim managed to get stay on it.
 STEP 6
Counter proposal by Grasim
• 27 Jan, 2003
Counter proposal of vertical demerger of cement
business to L&T board wherein it valued:
a. Cement business @Rs 130
b. Other businesses @Rs 162.5
Total L&T @Rs 292.5
• Also proposed to make an open offer to acquire
cement Co. upon demerger.
 STEP 7
SEBI’s approval
• April 2003
SEBI concluded that Grasim has not violated
any regulations subject to making additional
disclosures.
• 7 May,2003 : Offer opened
• 5 June,2003 : Offer closed
• Offer failed : Acquired only 0.38% stake
• Open market : Acquired 0.83% stake
 STEP 8
Structured Demerger Deal
STEP 1: Formation of ULTRA TECH Cement Ltd.
STEP 2: Effect on L&T’s equity & paid-up capital.
STEP 3: UltraTech’s paid-up capital.
STEP 4: Share of L&T in Ultra Tech.
STEP 5: Share of Grasim in Ultra Tech.
STEP 6: Open offer for 30% stake by Grasim.
STEP 7: Doubling of price for 8.5% + 30% stake
STEP 8: Liquidation of 11.5% stake of L&T.
STEP 9: Selling of pre-demerger stake of Grasim.
 STEP 1
Formation of ULTRA TECH Cement Ltd.

• 1 April,2003
a. Cement business of L&T was vested in separate
company (UltraTech Cement Limited)
b. Grasim would acquire control of the resultant
cement Co.
c. L&T would retain key assets like L&T brand,
ready-mix cement, Gas Power plant in
A.P.,residential and office property of cement
division.
 STEP 2
Effect on L&T’s paid-up capital.

• L&T,s paid-up capital brought down to 12.44

crore shares @Rs 2 per share from 24.88
crore shares @Rs 10 per share.
• Therefore,
Old L&T New L&T
2 shares @Rs10 1 share @Rs2
per share per share
 STEP 3
UltraTech’s paid-up capital.

• Its paid-up capital consisted of 12.49 crore

shares @Rs 10 per share.
STEP 4
Share of L&T in Ultra Tech.
• L&T was allotted 20% of UltraTech’s equity.
• Remaining 80% was allotted to shareholders of
L&T i.e. 5 shares of = 2 shares of
L&T UltraTech
 STEP 5
Share of Grasim in Ultra Tech.
• Grasim would receive 12.5% stake against
15.73% in L&T.
• L&T would sell 8.5% stake from 20% to Grasim
@Rs 171.30 per share.
 STEP 6
Open offer for 30% stake by Grasim.
• UltraTech would make an open offer of 30%
@Rs171.30 per share.
• Initial allottment 12.5%
Sold by L&T 8.5%
Open offer 30.0%
Total 51.0%
 STEP 7
Doubling of price for 8.5% + 30% stake

• Actually Grasim paid Rs 342.60 instead of Rs

171.30
• This is because UltraTech issued half the
number of shares (12.49 crores) as against
24.88 crores shares of pre-merger L&T.
 STEP 8
Liquidation of 11.5% stake of L&T.

• Residual stake of L&T would be liquidated by it

in small trenches and to non-cement entities
by Dec 2009, if Birlas do exercise their right of
first refusal in negative.
 STEP 9
Selling of pre-demerger stake of Grasim.

• Grasim had to sell 14.93% of its 15.73% stake

in L&T to an employee’s trust of L&T @Rs 240
per share (pre-merger Rs 120 per share).
• The remaining 0.8% would be sold when the
employee trust would dilute its stake by 1%.
 Q:-Smart Negotiation by L&T
1. Sold 8.5% stake at very high price.
2. Made Birlas sell their 14.95% stake to
employees welfare trust.
3. Strengthen L&T’s Balance Sheet
4. Transfer of debts to Ultra Tech.
5. Debt to Equity ratio improved.
6. Selling of 11.5% stake in small trenches.
 1.Sold 8.5% stake at very high price

• L&T negotiated the 8.5% stake to be sold @Rs

342.60 instead of @Rs171.30. The doubling of
price was on account of the fact that as
against 24.88 cr shares, Ultra Tech issued half
the number of shares.
 2.Made Birlas sell their 14.93% stake to
employees welfare trust
• To get Birlas off their backs permanently
• That too without shelling out any money from
their pocket.
 3.Strengthen L&T’s Balance Sheet

1. Paid-up capital reduced to 10%.

2. Number of equity shares reduced to half.
3. Face value reduced to one-fifth.
4. EPS shoot up.
 4.Transfer of debts to Ultra Tech.
• Debts of Rs 2000 cr transferred to Ultra Tech
due to the formula of splitting common loans
specified under Sec 2(19AA) of income tax
Act,1961 which is mandatory if the demerger
has to be tax neutral
• Whereas the reserves transferred were only
Rs950cr .
 5.Debt to Equity ratio improved.
• Due to transfer of more debt to Ultra Tech, the
debt : equity ratio sharply improved to 0.5 : 1.
 6.Selling of 11.5% stake in small trenches.

• Sold 11.5% stake to different buyers b/w

Rs720 to Rs735 in 2009.
 Q:- Takeover strategies of Grasim
Str1. Bought 10.05% stake from RIL
Str2. Acquired 4.48% through subsidiary
Str3. Made open offer after more than 6 months
Str4. Appeal to SAT
Str5. Took stay on L&T’s proposal
Str6. Counter Proposal of Vertical Demerger
Str7. Creeping acquisition
Str8. Convinced FI’s
 Str1.
Bought 10.05% stake from RIL

• RIL knew that Grasim is in need so RIL raised

price.
• Grasim wanted to acquire L&T to become
largest producer of cement in India.
• 10.05% is a big chunk and Grasim was getting
it with very less efforts.
 Str2.
Acquired 4.48% through subsidiary
• 4.48% < 5%, therefore, no disclosures are to
be made.
• Acquiring through subsidiary did not let the
L&T know that Grasim is after L&T.
• Also Grasim bought it at less price than
before.
 Str3.
Made open offer after more than 6 months
• Open Offer =Rs 190.00
• Highest price paid =Rs 188.15
in 26 weeks
• Average of 26 weeks =Rs 174.93
• Prices during 2 weeks =Rs 170.08
 Str4.
Appeal to SAT
• When SEBI did not approve the open offer,
Grasim made an appeal to the SAT(Securities
Appellate Tribunal) against SEBI and gave
public notice as well.
 Str5.
Took stay on L&T’s proposal

• According to the proposal of L&T , Grasim

would have got only 3.5% stake in cement
business as against 14.53% in L&T.
• Grasim managed to get stay order from court
on this proposed demerger.
 Str6.
Counter Proposal of Vertical Demerger

• Grasim came to know that L&T management

tried to outsmart Grasim by mooting a
proposal to carve out its cement business into
subsidiary.
• So Grasim made a counter proposal of vertical
demerger against the L&T’s proposal.
 Str7.
Creeping acquisition
• Grasim acquired 0.83% stake post
announcement of open offer from the open
market.
• Whereas it could get only 0.38% stake in open
offer.
• Thereby taking a total to 15.73%.
• This pavedway for Grasim to make creeping
acquisition without making an open offer as also
to get board seats on L$T’s board.
 Str8.
Convinced FI’s
• While the open offer for L&T was going on,
Birlas had succeeded in convincing Fis about
the structured vertical demerger and also
about selling their shares in the resulting
Cement CO. either directly or in open offer.
 Q:-Defensive Strategies of L&T
• Str1. Proposal of demerger of cement
business into subsidiary.
• Str2. Consent for the structured deal
• Str3. Surrendered for survival.
• Str4. Good negotiation in the deal.
 Str1.
Proposal of demerger of cement business into subsidiary

• L&T : 75%
• Shareholders : 25%
• Because Grasim had a stake of 14.53%, it
would have got only 3.75% of cement
business.
• And Grasim had interest only in cement
business of L&T.
 Str3.
Surrendered for survival.

• Because FI’s turned towards Grasim, so L&T

gave consent for the structured deal for L&T’s
survival.
• So in order to keep control over L&T which
was a 10000 cr empire, the L&T management
agreed to give away cement business.
 Str4.
Good negotiation in the deal.

• L&T was able to retain

a. L&T brand
b. Ready mix cement(RMC)
c. Residential & office property of L&T
d. Gas power plant in AP
 Q:- Real Winners?
1. Real winners are the Birlas.
2. After acquisition capacity of Grasim and UltraTech
went up to 31 million tonnes.
3. Grasim became India’s largest producer and the 8th
largest in the world.
4. L&T was a premium brand and used to fetch higher
prices. Grasim was allowed to use the brand for 1
year. Within this period, Grasim managed to transfer
brand equity of ‘L&T Cement’ to ‘Ultra Tech Cement’.
5. While Grasim was strong in southern
markets, L&T was strong in rest of India.
6. L&T’s strong distribution network was very
vital to Grasim to push its own brand also.
7. The B/S shows that cement division had
incurred losses in 2002-03. Yet Grasim
acquired it. This is because Birlas were aware
that in next 4-5 years cement business would
turn highly profitable.
 Financial = PBT
performance Sales
L&T Ultra Ultra
L&T Tech Tech
2003-04 2007-08 2003-04 2007-08

7.84% 12.53% 1.8% 16.02%

Increase in profits from 2003-04 to
2007-08
L&T 307.96%

Ultra Tech 2494.92%