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 tonnes1. 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 subsidiarySTEP 3: Open offer after more than 6 months.STEP 4: Delay in open offer.STEP 5: Proposal by L&TSTEP 6: Counter proposal by GrasimSTEP 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 8Structured 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% stakeSTEP 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 Sheet4. 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 RILStr2. Acquired 4.48% through subsidiaryStr3. Made open offer after more than 6 monthsStr4. Appeal to SATStr5. Took stay on L&T’s proposalStr6. Counter Proposal of Vertical DemergerStr7. Creeping acquisitionStr8. 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 = PBTperformance Sales

L&T L&T

Ultra Tech

Ultra 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%