L&T: Restructuring the

Cement Business

L&T Restructuring the Cement Business

What factors motivated Grasim to acquire

RILs stake in L&T at a hefty premium?
Was the open offer price of Grasim
Reasonable?

Will the proposed de-merger unlock the

shareholder value of L&T?

L&T Restructuring the Cement Business

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

Capital
Risk

Company Value
Cost of Capital

Matching with First Principles

Reduce Risk
Restructuring
enhance value
through
strategies that...

Enhance life of assets

with potential
Enhance growth of
assets with potential

The Value Creation Matrix

Financial Dimension

Managerial
Dimension

Redeploy capital
Increase ROI

Improve management
Replace inefficient one

Risk
Dimension
Cost of capital
reduction

Value
Creation

Market
Valuation

Release Value

Operational
Dimension
Scale Economics
Improve margins

De-merger
Placing Value in the
Shareholders Hands

De-merger Concept
Shareholders

Company AB
Business A

Shares

De-merge

Company B

Business B
Business B

Post De-merger
Shareholders
Shares

Company AB
Business A

Company B

De-merger - The Aptech Case

Immediate results

Market Capitalization in Rs. crores

165.6

Apple

124.4

TOTAL

71.1

Aptech

94.5

Apple(Finance)

L&T De-merger of Cement Division

Background
% share

Cost

Per Share
Purchase of L&T from RIL (at 47%
premium) on Nov.18, 2001
Purchase of L&T from Open
Market

Total
(Rs/Cr)

10.05

306.6

776

5.65

166.5

234

15.7

1010

L&T: Restructuring the Cement

Business

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

Banks/
FIs/
Insurance

26.53%

Grasim

14.15%

Mutual
Funds /
UTI

11.98%

Indian
Public

31.68%

FIIs

6.35%

NRIs

0.75%

Private
Corporate
Bodies

18.08%

Others

4.63%

Response of L&T Management

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)

Kumar Mangalam Birlas Response

The main objective of the offer is to
bring down the Grasim Industries cost of
acquisition of the cement and engineering
major. Shareholders of L&T have several
options. The groups open offer for Larsen
& Toubro is not a mandatory offer, and
hence L&T shareholders are free to decide
whether they want to accept the offer
price.
Take it or leave it, says Birla on L&T Offer. Business Standard,
November 22, 2002

Indian Cement Industry

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

Possible Synergies:
Grasim & L&T Combine

Considerable presence in the western & southern

markets

Operating costs reduction

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

Enhanced Financial Flexibility

CDC Capital Partners Plan

L&T Cement Division

70% stake with L&T

25% stake with L&T shareholders
5% stake with CDC Capital Partners

Valuation of Cement business

$75 per ton or Rs 156-158 per share

Valuation Methodologies

Relative valuation using Market Multiple

Approach

Discounted Cash Flow (DCF) Methodology

Real Options

Relative Valuation
Market Multiple Approach

Multiples of earnings paid

= Purchase price per share / Targets fully

diluted EPS before extra-ordinary items

Multiples of cash flow paid

= Purchase price per share / Targets fully

diluted CFPS before extra-ordinary items

Relative Valuation
Market Multiple Approach

Multiples of EBIT paid

=(Aggregate purchase price of equity + Market

value of debt assumed) / Targets EBIT before
extra-ordinary items

Multiples of EBITDA paid

=(Aggregate purchase price of equity + Market

value of debt assumed) / Targets EBITDA
before extra-ordinary items

Relative Valuation
Market Multiple Approach

Multiple of book value paid

= Purchase price per share / Targets book

value per common share

Premium paid

= (Purchase price per share - Targets share

price pre-merger)/ Targets share price premerger

Relative Valuation
Market Multiple Approach

Multiples of replacement cost paid

= (Aggregate purchase price of equity +

Market value of debt assumed) / Replacement
cost of targets assets

What has happened ?

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%

Shareholders of L&T

Shares
2:5*

Restructuring
1:2
De-merged
Company

L&T Limited

L&T Trust 15.7%

Others
84.27%

FV of Rs 2 each -> FV of Rs 10 each

Assets & Liabilities

Pre-open offer
Grasim 12.6%
L&T
20%
Others 67.4%

Ultra Tech CemCo Ltd

*2 equity shares of
Rs 10 each for every
5 shares of Rs 10
each in L&T

Post open offer

Grasim 51.1%
L&T
11.5%
Others 37.4%

Open Offer
Buyer

Seller

Cost

Grasim

L&T

8.5

362 cr

Grasim

Others

30

1278 cr

38.5

1640

Total

Net Outflow
%
share

Cost
Per
Share

Total
(Rs/Cr)

Purchase of L&T from Reliance Ind

10.05

307

776

Purchase of L&T from Open Market

5.65

167

234

8.5

171

362

30

171

1,278

15.7

120

(468)

Purchase of CemCo from L&T

Open Offer for CemCO
Sale of shares in existing L&T
Net Outflow

2,182