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1. Initial Contacts and Discussion All the talks about Grasim , the flagship company of the Aditya Birla Group, a leading Indian business conglomerate showing keen interest in L&T started way back in Nov 2001. Kumar Mangalam Birla always wanted to become a major player in cement industry in India and worldwide. 1.1 Reliance out, Grasim in First step in order to fulfill his dreams began with acquiring of 10% stake of Reliance in L&T (Larsen and Toubro) for INR 766.5 crore. There seemed to be some planning behind this exchange of stocks between Reliance and Grasim because the Reliance Group (Reliance), which held 3.92% in L&T in September 2001, had increased its stake to 10.05% by November 2001, by acquiring over 15.8 million shares from the market. Reliance sold this entire stake to Grasim at Rs 306.60 per share, at a premium of 47% over the prevailing market price of Rs 208.50. Thus, since late‐2001, Grasim had acquired over 15% stake in L&T and had also made an open offer to L&T shareholders to further increase its stake. The deal seems to be a win‐win situation for the three entities concerned. Although Grasim and L&T have their fingers in many business pies, cement is the prime cash driver for both companies. The combine becomes the largest player in the cement sector, overtaking the Gujarat Ambuja‐ACC pairing. For Reliance, the deal translates to exiting from a non‐core business at a hefty profit and the inflow of much‐needed cash to fund some of its ongoing capital projects. In one stroke, Grasim has catapulted to the top spot in the cement sector as well as stalled the possible entry of an international major. Grasim is also expected to gain market leadership in the eastern, southern and western markets through this association; the Ambuja‐ACC combine will still rule the roost in the north, though. 4 1.2 Grasim’s first intermediate open offer In May 2002, Grasim further acquired a stake of 2.84% in L&T from the open market, taking its overall holding to 12.89%. These shares were purchased at prices ranging between Rs 175 to Rs 180. Justifying the above move, Grasimʹs President and Chief Financial Officer, D D Rathi, said that since the company had surplus cash with no immediate investment plans, increasing the stake in L&T seemed to be a good opportunity. The decline in the value of L&T stock since September 2001 had also induced Grasim into buying L&T shares. Industry observers however already had commented that there was a lot more behind Grasimʹs move than the strategic investment angle. They alleged that” Grasim was trying to make a ʹbackdoor entryʹ to take control in L&T”. 1.3 L&T’s kneejerk reaction This increase of stake of Grasim caused some uneasiness in the power circles of L&T. They tried to protect L&T from the possible takeover by Grasim Industries Limited by announcing new plans for cement division, L&T cement. In October 2002, Larsen & Toubro Ltd. (L&T), announced plans to spin off (demerge) its cement unit into a separate company. It was told that L&T was thinking of demerger for the past 3 years and not because of imminent threat posed by Grasim. The reason given was that, though the cement division generated 26% of the groupʹs revenues, it consumed over 75% of its total investments. As per the demerger plan, called the Structural Demerger, it was ruled that L&T along with financial institutions (FIs) would hold 76% in the new cement company, while the remaining 24% would be distributed among the existing shareholders of L&T. L&T 5
Since Grasim had spent over Rs 10 billion in acquiring its L&T stake.6 per share to Reliance to pick up its initial stake of slightly more than 10 per cent. L&T announced that it was considering the proposal made by Commonwealth Development Corporation (CDC). Grasim nominees blamed the other board members for the ʹbelow par performance of L&T in 2002 (the company had reported a profit of Rs 188. L&T.9 million for the quarter ended June 2002. Another clause in CDC's proposal stated that L&T required the approval of CDC if it wanted to come out with an initial public offering (IPO) for the cement business. Under this proposal.5 Grasim’s intermediate unsuccessful open offer The open offer at Rs 190 per share by Grasim to acquire 20% stake in L&T was put on hold by the Securities Exchange Board of India (SEBI) pending investigations into the deal including ʺchange in controlʹʹ. was trying to retain control of the business division with itself. as a result of which individual shareholders would not have much control over the new cement company 1. retain the control in the company for the following 4 or 5 years and subsequently. Grasimʹs stake in the cement business would come down to 3. Significantly. a UK based company. 6 1. Reportedly. the cement unit was to be demerged into a separate entity which would be listed on the stock exchanges. to invest in its cement business. would not hold anything. and well‐founded. as a company. Grasim had paid Rs 306.6 Twist in the Tale: L&T’s new maneuver In December 2002. L&T and Grasim nominees on the L&T board were resorting to ʹmutual fault finding. called the strike price. Grasim therefore charged that L&T.8% equity stake by December 2004. According to a clause in CDCʹs proposal. We are the seller . the premium for corporate control has been anywhere between 100 per cent and 150 per cent of the market price levels in most deals of consequence. In general. through the demerger plan. view that the price was low.would later sell 6% of its share to the FIs. CDC was to subscribe to optionally convertible debentures of L&Tʹs demerged cement business and with an option to convert the debentures into 6. CDC would convert the debentures into equity only when the share price of the demerged cement company reached a specific price. All L&T shareholders including the Aditya Birla Group would get shares in the new company. as compared to Rs 651 million for the same period in 2001). Comments from both sides We are not the buyer who would naturally look for the lowest valuations. As soon as the open offer was announced. it was not ready to let go off the latterʹs cement business (one of its own core businesses).ʹ While other directors blamed Grasim for insider trading. L&T shareholders would only get a 24% stake in the new cement company. sell half of the 70% stake to a strategic partner. it could redeem them in three equal installments between 2004 and 2007.4 Grasim’s Proposal Announcement Grasim came out with an alternate vertical demerger plan in November 2002. Grasim claimed that under L&Tʹs demerger plan. the relationship between the board members of Grasim and L&T also became increasingly hostile. in takeover situations. without focusing on overall shareholdersʹ interests. If CDC decided to hold on to the debentures. The strike price was fixed as Rs 158 per share. However. there was a widespread. if L&Tʹs demerger plan went through. 1. According to this plan.75%.
getting funds at the current time at the best future valuations is what the shareholder is looking for and that is what L&T has done. The Aditya Birla Group. Mr. Concurrently. Kumar Mangalam Birla. ʺIt is obvious that the whole purpose of this exercise is to create confusion in the minds of the shareholders of L&T and change the very structure of the target company. 14 May.ʺ ‐ Grasimʹs solicitors. Chairman & Managing Director.grasim. in December 2002 2. This was at a 15% premium to ACC and 32% discount to GACL valuations.95 per cent of their holding in the demerged L&T to the L&T Employee Welfare Foundation. 2004 Mumbai L&T completes cement restructuring. Source: http://www.M. L&T. commenting on L&Tʹs demerger proposal. Accordingly.htm 3. said ʺThis transaction. . As a seller. speaking in favor of potential buyer CDCʹs proposal. EV/ton worked out to US$83 per ton of capacity (US$105 per ton of production). Grasim acquires majority stake in UltraTech Larsen & Toubro Limited (L&T) and Grasim Industries Limited (Grasim) today announced that the implementation process of the demerger of the cement division of L&T has been completed. the cement business undertaking was transferred to and vested in UltraTech CemCo Limited. and Grasim and its associates have sold 14.ʺ 9 Says Mr. Grasim had made a successful open offer bid for 30 per cent of the equity of UltraTech with a view of taking management control. Naik. so that essential features of our clientsʹ offer would be greatly prejudiced and jeopardized. ʺThis transaction reflects our commitment to build a leadership position in cement. Valuation As per the open offer price of Rs346 per share. became effective from Friday. A. the demerged cement business of L&T. Grasim acquired 8.ʺ The transaction is expected to provide UltraTech an opportunity to leverage synergies with Grasim and strengthen their ability to compete in the Indian and overseas markets. We believe that it will take about two to three years for UltraTech to provide a competitive return on the aggressive price offered to its shareholders. one of the biggest in corporate India. has helped to unlock value for its shareholders and position the demerged L&T as a more focused engineering and construction co.ʺ ‐ An L&T spokesman. Chairman.com/media/press_releases/200406june/20040622_ultratech.looking for the best valuations. L&T. and Grasim has acquired majority stake in UltraTech CemCo Limited (UltraTech). The scheme of arrangement for the demerger of the cement business. in December 2002. Acquisition Announcement PRESS RELEASE 6 July. 2004.5 per cent equity stake of UltraTech from L&T. Speaking on the occasion. sanctioned by the Honorable High Court of Bombay.
This has enabled the brand to command a premium over the other cement brands. . Part of this premium could be attributed to a premium for acquiring controlling stake in the company through the offer. Maruti Udyog) and Arun Gandhi (Tata Sons). Grasim) and D. C. The time was short and there were two choices. L&T cement which enjoyed leadership position in the premium cement market epitomized engineering prowess.6) and Gujarat Ambuja (15. • L&Tʹs brand equity is strong across the country and its product commands a slightly higher price. Grasim was offering to pay US$83 per ton for its stake in UCL. Mishra (Corporate & HR Director. L&T was a leading brand in the premium segment of the cement market. namely.1 Stock Exchange Listing Immediately after the takeover the new entity named. 14 Grasim was faced with a tough task. At the offer price of Rs346. Kumarmangalam Birla will step down from the board of L&T. four from Grasim. The listing price however would not include a ‘Control Premium’ and was likely to be lower than the offer price.2 Setting Up of New Board The new board for the company was set up .5% discount to ACC).4x is on the higher side as compared to ACC (14. 5. 5. merge the L&T brand with existing Grasim brands or launch a new brand. Steps Subsequent to announcement of the deal 5. Even if Cemco managed to get a valuation similar to ACC at US$72 per ton. The acquisition gave Grasim an entry into the premium segment of the market. Rajashree Birla.3 Rebranding Grasim was having cement brands like Birla plus and Birla super in the 150 mn TPA Cement market in India. • According to Mr K Birla there would be Rs 100 crore savings between the two companies on account of savings in logistics and procurement. 5. fair price works out to Rs306. the fair price worked out to Rs293 per share. 11 Based on an EV/Ton of US$70 (2. including two nominees from the institutions. two from L&T — Mr. Based on operational parameters. Kumaramangalam Birla. 4. There are also two independent directors — R. EV/EBIDTA at 15. Grasim was allowed 8 months to use the L&T brand. Its EBIDTA margins were lower than both its peers. which justified its premium valuation. Saurabh Mishra was appointed the Chief Executive Officer of UTCC. technology quality and modernity.GACL was the most efficient player in the cement industry. “Ultratech Cement Company” was listed on the Bombay stock exchange. D.4). Naik and Deosthale. Synergies Claimed • The geographical overlap is not significant and this may offer logistical advantages (freight costs) in manufacturing and catering to different markets. Both Ms. Bhargava (former Managing Direcor. Rajashree Birla and Mr. • The capacities of L&T and Grasim are fairly contemporary as both have grown their cement businesses through the 1990s. S. ROCE was a low 4%. The company decided on the later and did it with style. Cemcos was expected to trade at a discount to Gujarat Ambuja as well as ACC on listing. Rathi. • This should be a big plus in an environment where volumes and efficiencies are becoming the earnings driver and the key for `survivalʹ in cement.
2004 were entitled to 5 shares of the L&T Engineering (Face value Rs2) and 4 shares of UCL (Face value Rs 10) for every 10 shares held in erstwhile L&T Ltd. According to the arrangement. • L&T transferred as promised 8. 470 crore. • This internally funded Rs.200 Crore required for entire deal was funded from internal accruals of Grasim Industries. Total cash inflow for Grasim at around Rs. a high decibel ad blitz was launched to announce that L&T is now Ultratech. following the demerger of L&Tʹs cement business. Prior to merger Grasim held 12. Structuring of Deal • Shareholders of L&T as on May 27. 120 per share. • Grasim made an open offer for 30% equity stake. Hence the name Ultratech was chosen.6 per share. • Net cash outflow for Grasim on this deal will be Rs. 7.2. Ultratech was positioned as the ʹ Engineerʹs choiceʺ cement emphasizing on the qualities such as Quality. 15 6. 1278 crore. Modernity and technology. This meant a final price of Rs346 per share was on offer to all those tendering their shares in the open offer. So inorder to command a premium. • In addition. • Grasim successfully made an open offer to the shareholders of UCL to acquire upto 30% of the stake at Rs342. Since Grasim didnot want to dilute the premiumness that L&T enjoyed. Closure of the Deal . Total investment for Grasim (including its earlier purchase from Reliance and open market of Rs.The name Ultratech was chosen after careful marketing research. Since L&T does not mean anything by virtue of the brand name.6% in UCL. 2.1% stake in UCL.74 per cent stake it holds in the engineering company to L&Tʹs employeesʹ trust. Total investment outlay was around 362 crore.5% equity of L&T in the new cement company. enabling Grasim to acquire a controlling 51.6bn) for the open offer. the brand had to show a significant differentiation. • Grasim Industries had arrived at an informal understanding with Larsen & Toubro to offload 14. sold the stake to the L&T employeesʹ trust at Rs 120 per share. • Grasim sold its entire existing holding in L&T’s non‐cement (engineering and other business) at Rs. Rs3 per share were to be paid out of the interest on the money deposited in the escrow account (Rs12. Grasim. 1020 crore) around Rs 2190 crore on this deal • The Rs. Financing of Deal • Grasim Industries acquired 8. The gamble has paid off well for Aditya Birla group and Ultratech was able to carry the legacy of L&T cement.200 Crores transaction is the largest of its kind cash acquisition 17 8. Total Investment outlay at Rs.95 per cent out of the 15. Grasim wanted the new brandname to portray significant intrinsic value of the brand. Cement is basically viewed as a commodity and the industry is fragmented with around 50 players. The campaigns was backed with direct marketing where the company officials met the 5500 odd stockists and authorised dealers explaining the brand and company policies. The offer had opened on June 7 and closed on June 21 2004. 1170 crores.5% of its holding in UCL to Grasim at the open Offer price.
3 crore for the second quarter and a net loss of Rs 3.com/bline/iw/2002/10/20/stories/2002102000210800. BCG group was the advisor of L&T for a very long time. They helped them with valuation of company.54 per cent from the year‐ago despatch quantity. Net profit grew by 573 per cent from Rs. • Subsequently as a result. up from Rs 130.thehindubusinessline. became effective from Friday. Despatches at Grasim Cement moved up 12. References http://www. amounting to 11.com/cms/print.279 Crs • The scheme of arrangement for the demerger of the cement business.65 million in the last quarter of 2006‐07. 2004 • High Court approved the Scheme of Arrangement on 22nd April 2004 • Grasim deposited balance 90% of Open Offer consideration with Escrow Agent. Transaction advisor for the deal was JM Morgan Stanley and Mulla and Mulla group was the legal advisor. Total amount deposited Rs. Production increased 14. year‐on‐year. tons and clinker at 0.019 per ton increased by 50 per cent.• Shareholders and Creditors of L&T approved the Scheme on 3rd Feb.htm . 2004. in its first reported results since its listing on the stock exchanges The companyʹs performance has been constrained because of input costs.5 crore reported for the corresponding quarter of the previous year.com/iw/2003/02/23/stories/2003022300490800.htm http://www. Domestic cement realisations at Rs. sanctioned by the Honorable High Court of Bombay. the cement business undertaking was transferred to and vested in UltraTech CemCo Limited. They were advised by BCG as early as 1999 to come out of cement business gradually and focus on their more profitable engineering and defense business.grasim. 2004.com/iw/2002/12/08/stories/2002120800030800. 9.blonnet.214 crore.32 crore to Rs. 19 10. said a company release. Its sale of cement stood at 3. mainly those of power and fuel.thehindubusinessline.htm www.com/investors/downloads/Grasim_Annual_Report_FY2005. 2004.57 mn. Grasim Industries have reported increased shipments. 14 May. • HIGHER sales volumes and realisations in all of its businesses have helped Grasim Industries report a 68 per cent increase in net profit for the quarter ended June 30. • Accordingly.3. tons.thehindubusinessline. • Grasim increased exports with increase in capacity.com/bline/2003/06/18/stories/2003061802280100.77 mn. Ultra Tech Cement reported a 76 per cent rise in net profit at US$ 56.1.htm www.61 lakh t. Subsequent performance • ULTRATECH CemCo Ltd had reported a net loss of Rs 2.3 crore for the half‐year ended September 30.rediff. • UltraTech draws up Rs 200‐cr capex plan (Q2 2004) for the next two years that would generate around 2.36 per cent to 11.5 million tonnes of capacity through debottlenecking and reduction of the companyʹs debt equity ratio.htm www. ICRA was the valuation advisory for L&T. Advisors to Deal Advisor to Grasim was Enam Securities. 11. for both Grasim Cement as well as UltraTech Cemco Ltd.jsp?docpath=//money/2004/feb/05birla.pdf http://www.37 lakh tonnes. Net profit for the quarter amounted to Rs 219 crore.
thehindubusinessline.com/money/2003/jun/21spec.PDF www.htm www.icmr.org/PDF/Finance.com/about_us/milestones.www.com/2003/20030216/biz.com/media/press_reports/20040706_cement_deal.rediff.htm .indiainfoline.htm www.grasim.grasim.htm www.pdf www.icfai.com/sect/cemo.com/bline/iw/2002/10/20/stories/2002102000210800.tribuneindia.htm www.