MERGER REPORT

OF
RASSI CEMENT
&
INDIA CEMENT
Seventy-seven-year-old B.V.Raju, (Raju) vice-chairman of the Hyderabad (India) based
Raasi Cements (Raasi) mobilized all his daughters, sons-in-law, and grandchildren in a
display of family unity. "We are one united family and will ward off any takeover threats. I
am a humble, simple man who has always maintained a low profile. But when it comes to
fighting, I shall not be found wanting,"1 he declared. Raju's comments came in response to
reports that N. Srinivasan2(Srinivasan), was buying Raasi's share in the market. The Raasi
scrip, which hovered around Rs 50 till November 1997, tripled in value to Rs 158 in January
1998. Srinivasan had acquired 18.03% of Raasi shares by January 1998.

Industry Profile

In  the late 1990's the Indian cement industry was a highly fragmented one.

There were 117 plants belonging to 59 companies spread across the length and breadth of the
country, with an installed capacity of 109.97 mtpa. In the early 1990s, the industry expanded
considerably as new plants with large capacities came up. The success of the economic
reforms of the early 1990s was a boost to the expansion plans of the cement companies.
However, in the mid and late 1990s, as demand for cement declined, the share prices of most
companies fell. In the late 1990s, acquisitions triggered off consolidation in the cement
Industry. The process of consolidation started in 1998 with ICL taking over Visaka Cement
and CCI's plant at Yerraguntla, (Andhra Pradesh) and Grasim taking over Dharani Cement
and Shri Digvijay Cements

Cement is a cyclical industry in which long periods of growth are interspersed by shorter
periods of decline. Over recent decades, different geographical markets have experienced
different cycles, meaning that it is comparatively rare for their periods of decline to coincide.
This also means that as a rule the number of markets in growth at any one time will exceed
those in decline. This is a significant factor for the long-term outlook of the cement sector,
meaning that growth prospects for the industry are encouraging, despite the 2007 downturn in
the US.

Background

Raasi cement promoted by B.V.Raju and N P K Raju in 1978. B.V.Raju was the vice
chairman of Raasi cement.

Other than cement, the group also had interests in ceramics and paper. Main Industry is
located in Hyderabad. Raasi owned 39.5% stake on Sri Vishnu Cement Ltd. (SVCL). It had a
Bailout Takeover on SVCL and Raasi is nurturing SVCL. Raasi's cement division had a
capacity of 1.60 mtpa and it is a low cost cement producer.

Cement is a cyclical industry in which long periods of growth are interspersed by shorter
periods of decline. Over recent decades, different geographical markets have experienced
different cycles, meaning that it is comparatively rare for their periods of decline to coincide.
This also means that as a rule the number of markets in growth at any one time will exceed
those in decline.
Indian Cement Ltd., was one of the largest cement producers in south India. Established in
1946 in Tamilnadu. Cement constituted approximately 97% of ICL's total revenues. The
process of acquisitions triggered off and started with taking over of Visaka Cement and CCI's
plant at Yerraguntla, (Andhra Pradesh) and Grasim taking over Dharani Cement and Shri
Digvijay Cements.

In early 1998, ICL had six cement plants, three each in Tamil Nadu and Andhra Pradesh. ICL
entered Andhra Pradesh by acquiring the Chilamakur plant from Coromandel Fertilizers in
1990. N.srinivasan – vice chairman of ICL. Until 1982, the government controlledthe price
and distribution of the cement since the production wasn’t sufficient to meet the entire
demand. The industry was partially decontrolled in 1982 and this gave impetus to its pace of
growth.

The Takeover of Raasi

Hostile takeover - The method of trying to take the control of the company without the
knowledge of the existing management is known as “hostile takeover”.

There is always a tendency of Financial Institutions (FI) to help out Promoters in hostile
takeovers. However, in Raasi Cements Limited (RCL) and India Cements Limited (ICL), FIs
felt cheated. ICL in its hostile bid for RCL made an open offer for RCL shares at Rs. 300 per
share when the share price was at Rs. 100. Promoters of RCL sold out its 32% stake to ICL in
a negotiated deal during the term of the open offer at price ranging between Rs.200 to Rs.
286 per share. ICL had full control of RCL without having to purchase single share from the
institutional investors.

Earlier, 1995 Srinivasan got 4% share(0.68 m),1996 – increased to 5%, 1997 – increased to
8%. By January 1998, Srinivasan had accumulated 18.03% of Raasi's equity, both through
open market purchases as well as by buying out the stake of an estranged faction of the Raju
family. In February 1998, Srinivasan announced an open offer to acquire an additional 20%
of Raasi's equity. He offered Rs. 300 per share, 72.41% above the stock market price of Rs.
174 on February 26, 1998.

On March 1, 1998, the state-owned APIDC sold its 2.13% stake in Raasi to ICL. Chennai-
based stockbroker, Valampuri & Co., cornered 1.40 % of Raasi's equity from the market for
Srinivasan, taking ICL's stake in Raasi to 21.56%. If it gets share from V.p. Babaria – stake
will increase to 28.56 % and it will become the Vito-power to the company. After
Negotiation ICL team bought Raasi shares for Rs. 286 a share, i.e.,) Rs. 1.49 billion.

Reasons for ICL to takeover Raasi

Demand in Southern region was driven by the housing sector in Kerala and Tamil
Nadu, and large infrastructural developmental work in Andhra Pradesh. During the
period 2000-05, demand for cement was expected to grow at 10-12% per annum.
Therefore, prices were expected to increase by at least 5%-6% p.a. in 2000-05. Raasi
seemed to be an attractive target for ICL as it was a relatively low cost producer.
Analysts felt that Raasi failed to capitalize on its low production cost, because of its
weak marketing set-up, particularly in Kerala and Tamil Nadu. Raasi tended to dump
the cement in its weak markets thereby putting pressure on other players in the region.
The takeover of Raasi also would help in rationalization of various markets between
ICL and Raasi, and interchangeable use of Sankar, Coromandel and Raasi brand
names. Raju had no sons, but his three sons-in-law were involved with the running of
the company, and at least one of them seemed to be interested in selling out.

The company's audited statement of accounts for 1997-98 has thrown up a slew of
qualifications by the auditors on several transactions and business practices adopted
by the previous regime. In fact, the auditors, M Bhaskara Rao and Co, while strongly
qualifying their report, have expressed their inability to even give an opinion on the
likely impact of these transactions on the Rs 6.5-crore net profit on a turnover of Rs
392.56 crore reported for the year. According to them, the present management is not
only reviewing all these transactions but is "initiating recovery proceedings."

Many of these transactions reflect possible diversion of funds from Raasi Cement to
other companies in which the Raju family were either directly or indirectly interested.
Raasi Cement during the previous fiscal had sold about 22,543 tonnes of clinker to
Viswam Cements and Maatha Cements, concerns reportedly close to Raju family, at
prices substantially below the average cost of production. The report, however, does
not quantify the extent of loss to Raasi Cement on account of this transaction.

Other transactions with Maatha Cements include an interest-free advance of Rs 75

lakh for manufacturing slag cement which is yet to be returned despite the fact that the
contract was terminated. For the same purpose, Raasi Cement had transferred material
to the Maatha Cements, value of which according to the former's record was Rs 84.43
crore. But when the stock was verified physically, a shortage of materials worth Rs
49.05 lakh came to light.

Raasi Cement has also granted an advance to Sri Krishna Cement, a company in
which the former managing director KV Vishnu Raju is a director, for meeting the
latter's capital expenditure. The outstanding amount of Rs 4.10 crore was classified
under capital WIP in Raasi Cement's 1996-97 accounts and not as loans and advances.

Raju family seems to have liberally used Raasi Cement funds for their associate
concerns and as on March 31, 1998, Rs 5.85 crore was due from them. The dues at
one point of time was as high as Rs 10.87 crore. While Raasi Cement was asked to
pay an interest of 24 per cent per annum for monies borrowed from group companies,
no interest was charged on amounts lent to them.

In fact, BV Raju was paid Rs 17.55-lakh as interest for an unsecured loan to the paper
division without the board's approval. Another case is purchase of coal by Raasi
Cement from Sri Vishnu Cement for Rs 82.56 lakh, the company is now ascertaining
whether the coal was received at all. The management, according to the annual report,
is also looking into irregularities in the incentive scheme to some transport contractors
involving Rs 5.49 crore.

Post Takeover Strategies

Combined cement capacity of ICL increase up to 8 mtpa. Operating income of ICL-
Raasi combine grew by 55% due to availability of high cement capacity and steep rise
in income. The company was able to reduce its freight charges and utilize resources
efficiently. Synergy increase its market share from 15% in 1998 to 25 – 26% in 1999.

Combined synergy is to achieve value addition and greater penetration in southern

region. Combined synergy leads to expansion of plants to enhance productivity and
efficiency to produce nearly 10 million tones in 2001. Burden of debt due to
acquisition is very high seen from rising debt equity ratio. Profitability of the merged
firm has gone down from 8% to 4% in 2001 leads to lack of realization in synergy.

In order to realize the synergy the leverage should be brought down and cash flow
should be generated. Existing distribution infrastructure of Raasi helps ICL to
leverage this to reduce the freight and other costs. In oct- ’99 Raasi sold 39.5% stake
to ICL.

Performance of ICL with Raasi

Years Number Of Shareholders

1995 16399
1996 17155
1997 18037
1998 22226
1999 33195
2000 37682
2001 39304
2002 44343
2003 51030
2004 45441
2005 49882
2006 48256
2007 117751
2008(Meltdown) 72814

Conclusion

The whole company currently has a production capacity of 9.1Mt/year. ICL

with subsidiary Raasi cement is going well, so the takeover is valuable. A
source said that ICL sells about 90% of its production in Kerala, Andra pradesh
and Tamil Nadu, all this is due to capacity improved by acquisition of cement
companies like Raasi cements.