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DEMERGER OF ULTRATECH CEMENT BY L&T

AND ITS

ACQUISITION BYGRASIM

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GRASIM WAS BADLY

AFTER L&T

WHY?

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Grasim wanted to acquire only L&T.

Its root cause is in another story.

1. L&Ts 10.05% stake was with RIL which is abig chunk. RIL was ready to sell.

2. RIL acquired it in late 1980s with a hope toacquire L&T as a whole as L&T had been athoroughly managed company and its corecompetence was turnkey engineering

projects.3. L&T fitted very well in RILs plan to set upmega projects one after another.

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Why RIL wanted to sell?

� RIL could not manage to get support from the

govt., public at large or FIs.

�

Largest shareholders of L&T were FIs whoheld 40% stake collectively out of which 27%

was held by LIC and UTI.

� Therefore FIs backed L&T management and

RIL had to step back.

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The main story

STEP 1: Acquired 10.05% stake from RIL.

STEP 2: Acquired 4.48% stake through subsidiary

STEP 3: Open offer after more than 6 months.STEP 4: Delay in open offer.

STEP 5: Proposal by L&T

STEP 6: Counter proposal by Grasim

STEP 7: SEBIs approval.

STEP 8: Structured demerger deal

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STEP 2:

Acquired 4.48% stake through

subsidiary

� Thereafter Grasim acquired 4.48% stake of 

L&T through an investment Co. that was asubsidiary of Grasim @Rs176.75 per share.

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STEP 3:

Open offer after more than 6

months.

� 13 Oct,2002

Grasim made a public announcement of anopen offer of 20% stake in L&T after more

than 6 months @Rs 190 per share.

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STEP 4

Delay in open offer.

� 24 Oct, 2002

Grasim filed the draft letter of offer with SEBI.

�8 Nov, 2002SEBI alleged violation of takeover regulations

with regard to acquisition of 10.05% stake

from RIL.� 18 Nov, 2002

Grasim appealed to SAT against SEBI.

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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.

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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.

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STEP 7

SEBIs approval

� April 2003

SEBI concluded that Grasim has not violated

any regulations subject to making additionaldisclosures.

� 7 May,2003 : Offer opened

�

5 June,2003 : Offer closed� Offer failed : Acquired only 0.38% stake

� Open market : Acquired 0.83% stake

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STEP 8

Structured Demerger DealSTEP 1: Formation of ULTRA TECH Cement Ltd.

STEP 2: Effect on L&Ts equity & paid-up capital.

STEP 3: UltraTechs 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% stake

STEP 8: Liquidation of 11.5% stake of L&T.STEP 9: Selling of pre-demerger stake of Grasim.

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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 inA.P.,residential and office property of cement

division.

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STEP 2

Effect on L&Ts 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 @Rs2per share per share

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STEP 3

UltraTechs paid-up capital.

� Its paid-up capital consisted of 12.49 croreshares @Rs 10 per share.

STEP 4Share of L&T in Ultra Tech.

� L&T was allotted 20% of UltraTechs equity.

� Remaining 80% was allotted to shareholdersof L&T i.e. 5 shares of = 2 shares of 

L&T UltraTech

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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.

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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%

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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.

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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.

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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 employees 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%.

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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.

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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.

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3.Strengthen L&Ts 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.

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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 .

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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.

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6.Selling of 11.5% stake in small

trenches.

� Sold 11.5% stake to different buyers b/w

Rs720 to Rs735 in 2009.

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Q:- Takeover strategies of Grasim

Str1. Bought 10.05% stake from RIL

Str2. Acquired 4.48% through subsidiary

Str3. Made open offer after more than 6 months

Str4. Appeal to SAT

Str5. Took stay on L&Ts proposal

Str6. Counter Proposal of Vertical Demerger

Str7. Creeping acquisition

Str8. Convinced FIs

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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 becomelargest producer of cement in India.

� 10.05% is a big chunk and Grasim was getting

it with very less efforts.

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Str2.

Acquired 4.48% through subsidiary

� 4.48% < 5%, therefore, no disclosures are to

be made.

�

Acquiring through subsidiary did not let theL&T know that Grasim is after L&T.

� Also Grasim bought it at less price than

before.

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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

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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.

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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&Ts proposal.

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Str7.

Creeping acquisition

� Grasim acquired 0.83% stake postannouncement of open offer from the openmarket.

� Whereas it could get only 0.38% stake in openoffer.

� Thereby taking a total to 15.73%.

�

This pavedway for Grasim to make creepingacquisition without making an open offer asalso to get board seats on L$Ts board.

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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.

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Str1.

Proposal of demerger of cement

business into subsidiary� L&T : 75%

� Shareholders : 25%

�

Because Grasim had a stake of 14.53%, itwould have got only 3.75% of cement

business.

� And Grasim had interest only in cement

business of L&T.

S 3

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Str3.

Surrendered for survival.

� Because FIs turned towards Grasim, so L&T

gave consent for the structured deal for L&Ts

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.

S 4

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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

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Q:- Real Winners?

1. Real winners are the Birlas.

2. After acquisition capacity of Grasim andUltraTech went up to 31 million tonnes.

3. Grasim became Indias largest producer and the8th largest in the world.

4. L&T was a premium brand and used to fetchhigher prices. Grasim was allowed to use the

brand for 1 year. Within this period, Grasimmanaged to transfer brand equity of L&TCement to Ultra Tech Cement.

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5. While Grasim was strong in southern

markets, L&T was strong in rest of India.

6. L&Ts 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 wouldturn highly profitable.

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Financial = PBT

performance 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%

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Increase in profits from 2003-04 to

2007-08

L&T 307.96%

Ultra Tech 2494.92%