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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.

. ‡ Largest shareholders of L&T were FI s who held 40% stake collectively out of which 27% was held by LIC and UTI..Why RIL wanted to sell? ‡ RIL could not manage to get support from the govt. ‡ Therefore FI s backed L&T management and RIL had to step back. public at large or FI s.

STEP 4: Delay in open offer. STEP 5: Proposal by L&T STEP 6: Counter proposal by Grasim STEP 7: SEBI s approval.The main story STEP 1: Acquired 10.48% stake through subsidiary STEP 3: Open offer after more than 6 months. STEP 2: Acquired 4.05% stake from RIL. STEP 8: Structured demerger deal .

6 per share. .STEP 1 Acquired 10. 2001 Grasim acquired this stake at 46% higher rates @Rs 306.05% stake from RIL ‡ 18 Nov.

STEP 2: Acquired 4.48% stake through subsidiary ‡ Thereafter Grasim acquired 4.48% stake of L&T through an investment Co.75 per share. . that was a subsidiary of Grasim @Rs176.

.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.

‡ 18 Nov. ‡ 24 Oct. ‡ 8 Nov.05% stake from RIL.STEP 4 Delay in open offer. 2002 Grasim appealed to SAT against SEBI. 2002 Grasim filed the draft letter of offer with SEBI. . 2002 SEBI alleged violation of takeover regulations with regard to acquisition of 10.

Shareholders of L&T would have got balance 25% ‡ Grasim managed to get stay on it.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. .

.5 Total L&T @Rs 292.5 ‡ Also proposed to make an open offer to acquire cement Co. 2003 Counter proposal of vertical demerger of cement business to L&T board wherein it valued: a.STEP 6 Counter proposal by Grasim ‡ 27 Jan. upon demerger. Cement business @Rs 130 b. Other businesses @Rs 162.

2003 : Offer opened ‡ 5 June.83% stake .2003 : Offer closed ‡ Offer failed : Acquired only 0. ‡ 7 May.38% stake ‡ Open market : Acquired 0.STEP 7 SEBI s approval ‡ April 2003 SEBI concluded that Grasim has not violated any regulations subject to making additional disclosures.

STEP 6: Open offer for 30% stake by Grasim. STEP 9: Selling of pre-demerger stake of Grasim. .5% stake of L&T. STEP 4: Share of L&T in Ultra Tech. STEP 2: Effect on L&T s equity & paid-up capital.5% + 30% stake STEP 8: Liquidation of 11. STEP 5: Share of Grasim in Ultra Tech. STEP 7: Doubling of price for 8. STEP 3: UltraTech s paid-up capital.STEP 8 Structured Demerger Deal STEP 1: Formation of ULTRA TECH Cement Ltd.

Grasim would acquire control of the resultant cement Co.residential and office property of cement division. ‡ 1 April. .2003 a.P. ready-mix cement. c. Gas Power plant in A. L&T would retain key assets like L&T brand. Cement business of L&T was vested in separate company (UltraTech Cement Limited) b..STEP 1 Formation of ULTRA TECH Cement Ltd.

Old L&T New L&T 2 shares @Rs10 1 share @Rs2 per share per share .STEP 2 Effect on L&T s paid-up capital.s paid-up capital brought down to 12. ‡ Therefore. ‡ L&T.88 crore shares @Rs 10 per share.44 crore shares @Rs 2 per share from 24.

49 crore shares @Rs 10 per share. ‡ Remaining 80% was allotted to shareholders of L&T i.STEP 3 UltraTech s paid-up capital.e. ‡ L&T was allotted 20% of UltraTech s equity. ‡ Its paid-up capital consisted of 12. STEP 4 Share of L&T in Ultra Tech. 5 shares of = 2 shares of L&T UltraTech .

5% stake from 20% to Grasim @Rs 171. ‡ L&T would sell 8.5% stake against 15. .73% in L&T. ‡ Grasim would receive 12.STEP 5 Share of Grasim in Ultra Tech.30 per share.

‡ UltraTech would make an open offer of 30% @Rs171.5% Open offer 30. ‡ Initial allottment 12.30 per share.0% Total 51.STEP 6 Open offer for 30% stake by Grasim.5% Sold by L&T 8.0% .

49 crores) as against 24.STEP 7 Doubling of price for 8.30 ‡ This is because UltraTech issued half the number of shares (12. .60 instead of Rs 171.88 crores shares of pre-merger L&T.5% + 30% stake ‡ Actually Grasim paid Rs 342.

if Birlas do exercise their right of first refusal in negative.STEP 8 Liquidation of 11. ‡ Residual stake of L&T would be liquidated by it in small trenches and to non-cement entities by Dec 2009. .5% stake of L&T.

STEP 9 Selling of pre-demerger stake of Grasim.8% would be sold when the employee trust would dilute its stake by 1%.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. ‡ Grasim had to sell 14.

Debt to Equity ratio improved. Transfer of debts to Ultra Tech. 3. 2. 6.5% stake at very high price. Sold 8. 5. Strengthen L&T s Balance Sheet 4. .Q:-Smart Negotiation by L&T 1. Made Birlas sell their 14. Selling of 11.5% stake in small trenches.95% stake to employees welfare trust.

Ultra Tech issued half the number of shares.5% stake at very high price ‡ L&T negotiated the 8.30.60 instead of @Rs171.88 cr shares.5% stake to be sold @Rs 342. . The doubling of price was on account of the fact that as against 24.Sold 8.1.

2.93% stake to employees welfare trust ‡ To get Birlas off their backs permanently ‡ That too without shelling out any money from their pocket. .Made Birlas sell their 14.

Strengthen L&T s Balance Sheet 1. Number of equity shares reduced to half.3. EPS shoot up. Face value reduced to one-fifth. 2. Paid-up capital reduced to 10%. . 4. 3.

‡ 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.4. .1961 which is mandatory if the demerger has to be tax neutral ‡ Whereas the reserves transferred were only Rs950cr .Transfer of debts to Ultra Tech.

the debt : equity ratio sharply improved to 0. .5.5 : 1.Debt to Equity ratio improved. ‡ Due to transfer of more debt to Ultra Tech.

‡ Sold 11.5% stake in small trenches. .Selling of 11.5% stake to different buyers b/w Rs720 to Rs735 in 2009.6.

48% through subsidiary Str3. Appeal to SAT Str5.Takeover strategies of Grasim Str1. Bought 10. Made open offer after more than 6 months Str4. Took stay on L&T s proposal Str6.05% stake from RIL Str2. Counter Proposal of Vertical Demerger Str7. Convinced FI s . Creeping acquisition Str8. Acquired 4.Q:.

Str1. ‡ Grasim wanted to acquire L&T to become largest producer of cement in India.05% is a big chunk and Grasim was getting it with very less efforts.05% stake from RIL ‡ RIL knew that Grasim is in need so RIL raised price. Bought 10. ‡ 10. .

Str2. . therefore. ‡ Also Grasim bought it at less price than before. ‡ Acquiring through subsidiary did not let the L&T know that Grasim is after L&T. Acquired 4.48% < 5%.48% through subsidiary ‡ 4. no disclosures are to be made.

08 . Made open offer after more than 6 months ‡ Open Offer ‡ Highest price paid in 26 weeks ‡ Average of 26 weeks ‡ Prices during 2 weeks =Rs 190.Str3.93 =Rs 170.15 =Rs 174.00 =Rs 188.

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.

Grasim would have got only 3. Took stay on L&T s proposal ‡ According to the proposal of L&T .5% stake in cement business as against 14. . ‡ Grasim managed to get stay order from court on this proposed demerger.53% in L&T.Str5.

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. ‡ Thereby taking a total to 15.83% stake post announcement of open offer from the open market.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.38% stake in open offer. ‡ Whereas it could get only 0.

Str8. . Birlas had succeeded in convincing Fis about the structured vertical demerger and also about selling their shares in the resulting Cement CO. Convinced FI s ‡ While the open offer for L&T was going on. either directly or in open offer.

Surrendered for survival. . Good negotiation in the deal. ‡ Str2. Proposal of demerger of cement business into subsidiary.Q:-Defensive Strategies of L&T ‡ Str1. ‡ Str4. Consent for the structured deal ‡ Str3.

53%.75% of cement business. Proposal of demerger of cement business into subsidiary ‡ L&T : 75% ‡ Shareholders : 25% ‡ Because Grasim had a stake of 14. . ‡ And Grasim had interest only in cement business of L&T. it would have got only 3.Str1.

‡ So in order to keep control over L&T which was a 10000 cr empire. so L&T gave consent for the structured deal for L&T s survival. Surrendered for survival.Str3. . ‡ Because FI s turned towards Grasim. the L&T management agreed to give away cement business.

Good negotiation in the deal. Gas power plant in AP . L&T brand b. Ready mix cement(RMC) c. Residential & office property of L&T d. ‡ L&T was able to retain a.Str4.

. 2. Grasim became India s largest producer and the 8th largest in the world. 3. Grasim managed to transfer brand equity of L&T Cement to Ultra Tech Cement . Within this period. After acquisition capacity of Grasim and UltraTech went up to 31 million tonnes. L&T was a premium brand and used to fetch higher prices.Real Winners? 1. Grasim was allowed to use the brand for 1 year. Real winners are the Birlas.Q:. 4.

Yet Grasim acquired it. . L&T was strong in rest of India. 6. 7. While Grasim was strong in southern markets. This is because Birlas were aware that in next 4-5 years cement business would turn highly profitable.5. L&T s strong distribution network was very vital to Grasim to push its own brand also. The B/S shows that cement division had incurred losses in 2002-03.

Financial performance L&T 2003-04 L&T 2007-08 = PBT Sales Ultra Tech 2007-08 Ultra Tech 2003-04 7.84% 12.02% .53% 1.8% 16.

96% 2494.Increase in profits from 2003-04 to 2007-08 L&T Ultra Tech 307.92% .