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The Takeover of Raasi cements

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Raasi Cements-A brief Overview

• 1978: Company was Incorporated on 15th April, at Hyderabad. The Company was promoted by Andhra Pradesh Industrial Development Corporation Ltd.(APIDC), in the joint sector with N.K.P. Raju• 1979: 11,12,000 shares taken up by promoters, directors etc.11,57,000 shares allotted to APIDC. 25,000 pref. and 21,80,500 No. of equity shares offered at par to public in December.

• 1986: The Company acquired limestone mining lease over an area of 2,133.36 acres in Wadapalli, Irukagunda and Kothapalli villages. • 1991: Expansion scheme by installation of ropeway across river Krishna and certain energy saving equipments.• 1995: Raasi Ceramic Industry Limited became a subsidiary of the company. RCIL is engaged in

• production and sales of sanityware• 1997: The Indian Cements Group has acquired the controlling interest in the company.

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ICL- Company Highlights

The India Cements Ltd was established in 1946 and the first plant was setup at Sankarnagar in Tamilnadu in 1949 . Since then it has grown in stature to seven plants spread over Tamilnadu and Andhra Pradesh . The capacities as on March 2002 have increased multifold to 9 million tons per annum.

The Company is the largest producer of cement in South India. The Company's plants are well spread with three in Tamilnadu and four in Andhra Pradesh which cater to all major markets in South India and Maharashtra. The Company is the market leader with a market share of 28% in the South. It aims to achieve a 35% market share in the near future. The Company has access to huge limestone resources and plans to expand capacity by de-bottlenecking and optimisation of existing plants as well as by acquisitions. The Company has a strong distribution network with over 10,000 stockists of whom 25% are dedicated. The Company has well established brands- Sankar Super Power, Coromandel Super Power and Raasi Super Power. Regional offices in all southern states and Maharasthra offices/representative in every district.

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The Mission of ICL• Aiming High: We should be one of the largest Cement Companies in the Country. Our

growth in size will be through continuous review of potentials of the existing manufacturing resources, strategic acquisitions and expansions

• Core Competency: Cement will be our mainstay. However, we shall venture into related fields

which afford purposeful synergy.

• Value Addition: ICL will continuously strive to enhance its value to its customers,

ShareHolders and Employees.

• Community Welfare:As the organization grows, as a good Corporate Citizen, we shall be sensitive to the welfare and development needs of the Society around us.

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Why do companies go in for acqusitions ‘n’ mergers ?

• Acquisition of or merger with an existing concern is an instant means of achieving the expansion.

• Apart from the urge to grow, acquisitions and mergers are resorted to for purposes of achieving a measure of synergy between the parent and the acquired enterprises.

• Synergy may result from such bases as physical facilities, technical and managerial skills, distribution channels, general administration, research and development and so on.

The Beginning…

When India cements was passing through difficult times, in 1987-89 ,the then IDBI chairman S.S.Nadkarni had requested Mr.Raju to takeover the ailing company. But he had refused saying,” One should not close in on a weak colleague”.

It all started when Raasi, suspecting the possibility of takeover from one of India’s big corporate houses, Kotak Mahindra, sought the help of ICL . ICL started accumulating Raasi shares from the market , and it was too late when Mr.Raju realised that ICL was in possession of larger number of shares than it was told to accumulate .ICL had already acquired about 9 percent stake in Raasi cements.

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Why did ICL get in ?The takeover was driven primarily by the expectations of the benefits arising out of the

close coordination between the two companies : The acquisition would give ICL an additional market share of approximately 22-25

percent in Andhra Pradesh. ICL would have access to limestone reserves, a major raw material for cement. The existing distribution infrastructure of Raasi would help ICL to reduce the

freight and other costs, and would help avoid duplication of several other functions. Access to some of the cement deficit regions of Tamil Nadu and Kerala could help

ICL to strengthen its position in southern market. ICL could gain access to established brands like Raasi Gold. Raasi was a relatively low-cost producer because it possessed limestone reserves. The takeover of Raasi would also help in rationalisation of various markets between

ICL and Raasi, and interchangeable use of Sankar, Coromandel and Raasi brand names.

The Takeover Drama• The takeover battle started with ICL already holding a 9 percent stake

in Raasi cements.

• By January 1998, ICL gradually increased its stake in Raasi from 9 percent to a little over 18 percent with the help of the dissidents belonging to 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 stockmarket price of Rs 174 on February 26, 1998. Raasi's shareholders seemed to find it hard to turn down his offer.

• On March 1, 1998, the state-owned APIDC sold its 2.13% stake in Raasi to ICL. Subsequently, a 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%. And it further increased to 28.56% with V.P. Babaria, a transporter for both ICL and Raasi, selling off his 7% stake in Raasi.

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The Climax• Raju also had the option of making a counter-offer to his

shareholders, and weaning away potential sellers from Srinivasan. But this was an expensive option, (Raju needed approximately Rs 100 crore to make a counter bid) and he did not seem to have the funds to pull it off.

• In March 1998, realizing his predicament, Raju began to negotiate with Srinivasan to sell his 33% shares in the company.

• The battle of takeover saw India Cements end up paying a price that was around 60 percent above the then ruling market price of Raasi’s shares.

• However, this cost, according to some estimates was much lower when compared to the cost required for setting up a greenfield plant.

• The Rs 380-crore deal was one of the biggest ever acquisitions in Indian corporate history, and the first successful hostile takeover.

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Pre-Bid Takeover Defense adopted by RCL

Poison pills :• Poison pills are any type of defensive maneouvre

which a company might try in order to protect itself against unwanted takeover bids, eg stock issues, special distributions, spin-offs and management pay-outs.

• A corporate provision to combat hostile takeovers. The poison pill allows shareholders to acquire additional shares at below market price, thereby increasing the number of shares outstanding and making the takeover prohibitively expensive.

Some Legal Issues• Shri Vishnu Cement Limited (SVCL) ,a

subsidiary of RCL was transferred by Raju to 9 of his associates barely few days after the purchase by ICL.

• This was in violation of Regulation 23(1)(g) of the takeover code, which prohibits a target company from transferring its significant assets after a public announcement has been made by an acquirer to make an open offer for purchase of shares from the public.

Cont…• Retaining SVCL was of strategic importance for both ICL and

Raju. Having lost control of Raasi, Raju had no other foundation to build his empire on. On the other hand, ICL could further consolidate its presence in South India if it could control SVCL.

• The use of Poisson pill stretched the acquisition price too far thereby diluting the advantages of ICL .

• In October 1999 Raju sold his disputed 39.5% stake in SVCL to ICL in an out-of-court compromise settlement for Rs 1.15 billion. By the end of 2000, SVCL became a subsidiary of ICL.

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Post-Merger results• ICL succeeded in bringing down the power & fuel

costs, which ranged from34-37 percent to 28-29 percent.

• Advertising and marketing costs declined by more than 50 percent, from Rs.7.45 crores in FY 1997-98 to Rs.3.60 crores in FY 1998-99.

• The company embarked on a major technological up-gradation drive as well as capacity expansion.

• As a result of these post-merger measures, the company scaled up its capacity to ten million tons.

• Furthermore, it successfully stepped up its sales in Tamil Nadu and Kerala , achieving market share of 32 percent and 29 percent respectively.

FINANCIAL SYNERGY• Debt raising ability of combined firm can

be greater than the sum of the 2 firm’s ability before the merger.

• Substantial tax savings in investment income

• Economies of scale in flotation and transaction cost of securities.

• In a major drive to bring down the cost of debt and improve leverage, ICL intiated several measures after merger.

• Along with Raasi, came its loss making paper and ceramics divisions.

• But ICL sold off the subsidiaries of Raasi and merged the cement division of the company with itself wef April 1st 1998.

• But the burden of acquisition financing was very high.

• Increase of debt has lead to increase in the cost of debt.

• Lack of realisation of financial synergy is evident from the PAT figures that has reduced from 8%-4% in 2001.

OPERATING SYNERGY The basic premise of operating synergy is that

economies of scale arise due to indivisibilities such as people and equipment which provide increased returns.

During FY 1998-99 the combined cement capacity of ICL increased upto 8mn tpa.

The company was able to reduce the cost through freight rationalisations, lower power and fuel consumption and by efficiently utilising its existing resources.

As a result of efficient energy management , it was able to reduce the per ton power consumption from 114 units to 97 units.

Cont… The combine’s efforts to cut down employee costs

resulted in reduction in manpower by 1012 employees during the year under Voluntary Retirement Scheme (VRS).

Concerted efforts on brand building and value addition helped it achieve greater penetration in some parts of southern region.

Its market share in the entire region increased from 15 percent in 1997-98 to 25-26 percent in 1998-99.However, this was much below the pre-merger expectations of 30-35 percent.

CONCLUSION

• While the sales and margins have not improved to a desired level, the cost-cutting measures have already started yielding results.

• But the performance of combined company in the face of tough market conditions is not totally disappointing.

• It would be hasty to conclude that the merger has brought desired results.

• Synergies expected in the areas of sales expenses and material costs.

• Neither distribution nor material cost synergies were realized.

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