Friday, October 19, 2007

Grasim's Acquisition of L&T Cement Business - Case Study

1. Initial Contacts and Discussion
All the talks about Grasim , the flagship company of the Aditya Birla Group, a leading
Indian business conglomerate showing keen interest in L&T started way back in Nov
2001. Kumar Mangalam Birla always wanted to become a major player in cement
industry in India and worldwide.
1.1 Reliance out, Grasim in
First step in order to fulfill his dreams began with acquiring of 10% stake of Reliance in
L&T (Larsen and Toubro) for INR 766.5 crore. There seemed to be some planning
behind this exchange of stocks between Reliance and Grasim because the Reliance
Group (Reliance), which held 3.92% in L&T in September 2001, had increased its stake
to 10.05% by November 2001, by acquiring over 15.8 million shares from the market.
Reliance sold this entire stake to Grasim at Rs 306.60 per share, at a premium of 47%
over the prevailing market price of Rs 208.50. Thus, since late‐2001, Grasim had
acquired over 15% stake in L&T and had also made an open offer to L&T shareholders
to further increase its stake.
The deal seems to be a win‐win situation for the three entities concerned. Although
Grasim and L&T have their fingers in many business pies, cement is the prime cash
driver for both companies. The combine becomes the largest player in the cement
sector, overtaking the Gujarat Ambuja‐ACC pairing. For Reliance, the deal translates to
exiting from a non‐core business at a hefty profit and the inflow of much‐needed cash to
fund some of its ongoing capital projects. In one stroke, Grasim has catapulted to the
top spot in the cement sector as well as stalled the possible entry of an international
major. Grasim is also expected to gain market leadership in the eastern, southern and
western markets through this association; the Ambuja‐ACC combine will still rule the
roost in the north, though.
1.2 Grasim’s first intermediate open offer
In May 2002, Grasim further acquired a stake of 2.84% in L&T from the open market,
taking its overall holding to 12.89%. These shares were purchased at prices ranging
between Rs 175 to Rs 180.
Justifying the above move, Grasimʹs President and Chief Financial Officer, D D Rathi,
said that since the company had surplus cash with no immediate investment plans,
increasing the stake in L&T seemed to be a good opportunity. The decline in the value
of L&T stock since September 2001 had also induced Grasim into buying L&T shares.
Industry observers however already had commented that there was a lot more behind
Grasimʹs move than the strategic investment angle. They alleged that” Grasim was trying
to make a ʹbackdoor entryʹ to take control in L&T”.
1.3 L&T’s kneejerk reaction
This increase of stake of Grasim caused some uneasiness in the power circles of L&T.
They tried to protect L&T from the possible takeover by Grasim Industries Limited by
announcing new plans for cement division, L&T cement. In October 2002, Larsen &
Toubro Ltd. (L&T), announced plans to spin off (demerge) its cement unit into a
separate company. It was told that L&T was thinking of demerger for the past 3 years
and not because of imminent threat posed by Grasim. The reason given was that,
though the cement division generated 26% of the groupʹs revenues, it consumed over 75% of
its total investments.
As per the demerger plan, called the Structural Demerger, it was ruled that L&T along
with financial institutions (FIs) would hold 76% in the new cement company, while the
remaining 24% would be distributed among the existing shareholders of L&T. L&T
would later sell 6% of its share to the FIs, retain the control in the company for the
following 4 or 5 years and subsequently, sell half of the 70% stake to a strategic partner.
Grasimʹs stake in the cement business would come down to 3.75%, if L&Tʹs demerger
plan went through. Since Grasim had spent over Rs 10 billion in acquiring its L&T
stake, it was not ready to let go off the latterʹs cement business (one of its own core

Grasim therefore charged that L&T, through the demerger plan, was trying to retain
control of the business division with itself, without focusing on overall shareholdersʹ
interests. Grasim claimed that under L&Tʹs demerger plan, L&T shareholders would
only get a 24% stake in the new cement company, as a result of which individual
shareholders would not have much control over the new cement company
1.4 Grasim’s Proposal Announcement
Grasim came out with an alternate vertical demerger plan in November 2002.
According to this plan, the cement unit was to be demerged into a separate entity which
would be listed on the stock exchanges.
All L&T shareholders including the Aditya Birla Group would get shares in the new
company. However, L&T, as a company, would not hold anything. Reportedly, the
relationship between the board members of Grasim and L&T also became increasingly
hostile. L&T and Grasim nominees on the L&T board were resorting to ʹmutual fault
While other directors blamed Grasim for insider trading, Grasim nominees blamed the
other board members for the ʹbelow par performance of L&T in 2002 (the company had
reported a profit of Rs 188.9 million for the quarter ended June 2002, as compared to Rs
651 million for the same period in 2001).
1.5 Grasim’s intermediate unsuccessful open offer
The open offer at Rs 190 per share by Grasim to acquire 20% stake in L&T was put on
hold by the Securities Exchange Board of India (SEBI) pending investigations into the
deal including ʺchange in controlʹʹ. As soon as the open offer was announced, there was
a widespread, and well‐founded, view that the price was low. In general, in takeover
situations, the premium for corporate control has been anywhere between 100 per cent
and 150 per cent of the market price levels in most deals of consequence. Significantly,
Grasim had paid Rs 306.6 per share to Reliance to pick up its initial stake of slightly
more than 10 per cent.
1.6 Twist in the Tale: L&T’s new maneuver
In December 2002, L&T announced that it was considering the proposal made by
Commonwealth Development Corporation (CDC), a UK based company, to invest in its
cement business.
Under this proposal, CDC was to subscribe to optionally convertible debentures of
L&Tʹs demerged cement business and with an option to convert the debentures into
6.8% equity stake by December 2004. If CDC decided to hold on to the debentures, it
could redeem them in three equal installments between 2004 and 2007. According to a
clause in CDCʹs proposal, CDC would convert the debentures into equity only when the
share price of the demerged cement company reached a specific price, called the strike price. The strike price was fixed as Rs 158 per share. Another clause in CDC's proposal stated that L&T required the approval of CDC if it wanted to come out with an initial public offering (IPO) for the cement business.

Comments from both sides
We are not the buyer who would naturally look for the lowest valuations. We are the seller
looking for the best valuations. As a seller, getting funds at the current time at the best future
valuations is what the shareholder is looking for and that is what L&T has done.ʺ
‐ An L&T spokesman, speaking in favor of potential buyer CDCʹs proposal, in
December 2002.
ʺIt is obvious that the whole purpose of this exercise is to create confusion in the minds of the
shareholders of L&T and change the very structure of the target company, L&T, so that essential
features of our clientsʹ offer would be greatly prejudiced and jeopardized.ʺ
‐ Grasimʹs solicitors, commenting on L&Tʹs demerger proposal, in December 2002

2. Acquisition Announcement
6 July, 2004
L&T completes cement restructuring; Grasim acquires majority stake in UltraTech
Larsen & Toubro Limited (L&T) and Grasim Industries Limited (Grasim) today
announced that the implementation process of the demerger of the cement division of
L&T has been completed, and Grasim has acquired majority stake in UltraTech CemCo
Limited (UltraTech), the demerged cement business of L&T.
The scheme of arrangement for the demerger of the cement business, sanctioned by the
Honorable High Court of Bombay, became effective from Friday, 14 May, 2004.
Accordingly, the cement business undertaking was transferred to and vested in
UltraTech CemCo Limited.
Grasim had made a successful open offer bid for 30 per cent of the equity of UltraTech
with a view of taking management control. Concurrently, Grasim acquired 8.5 per cent
equity stake of UltraTech from L&T, and Grasim and its associates have sold 14.95 per
cent of their holding in the demerged L&T to the L&T Employee Welfare Foundation.
Speaking on the occasion, Mr. A.M. Naik, Chairman & Managing Director, L&T, said
ʺThis transaction, one of the biggest in corporate India, has helped to unlock value for
its shareholders and position the demerged L&T as a more focused engineering and
construction co.ʺ
Says Mr. Kumar Mangalam Birla, Chairman, The Aditya Birla Group, ʺThis transaction
reflects our commitment to build a leadership position in cement. We believe that it will
take about two to three years for UltraTech to provide a competitive return on the
aggressive price offered to its shareholders.ʺ
The transaction is expected to provide UltraTech an opportunity to leverage synergies
with Grasim and strengthen their ability to compete in the Indian and overseas markets.

3. Valuation

As per the open offer price of Rs346 per share, EV/ton worked out to US$83 per ton of
capacity (US$105 per ton of production). This was at a 15% premium to ACC and 32%
discount to GACL valuations.
GACL was the most efficient player in the cement industry, which justified its premium
valuation. At the offer price of Rs346, Grasim was offering to pay US$83 per ton for its
stake in UCL. Part of this premium could be attributed to a premium for acquiring
controlling stake in the company through the offer. The listing price however would not
include a ‘Control Premium’ and was likely to be lower than the offer price.
Based on operational parameters, Cemcos was expected to trade at a discount to Gujarat
Ambuja as well as ACC on listing. Its EBIDTA margins were lower than both its peers.
ROCE was a low 4%. EV/EBIDTA at 15.4x is on the higher side as compared to ACC
(14.6) and Gujarat Ambuja (15.4).
Based on an EV/Ton of US$70 (2.5% discount to ACC), the fair price worked out to
Rs293 per share. Even if Cemco managed to get a valuation similar to ACC at US$72 per
ton, fair price works out to Rs306.

4. Synergies Claimed
• The geographical overlap is not significant and this may offer logistical
advantages (freight costs) in manufacturing and catering to different markets.
• L&Tʹs brand equity is strong across the country and its product commands a
slightly higher price.
• The capacities of L&T and Grasim are fairly contemporary as both have grown
their cement businesses through the 1990s.
• This should be a big plus in an environment where volumes and efficiencies are
becoming the earnings driver and the key for `survivalʹ in cement.
• According to Mr K Birla there would be Rs 100 crore savings between the two
companies on account of savings in logistics and procurement.

5. Steps Subsequent to announcement of the deal
5.1 Stock Exchange Listing
Immediately after the takeover the new entity named, “Ultratech Cement Company”
was listed on the Bombay stock exchange.
5.2 Setting Up of New Board
The new board for the company was set up , including two nominees from the
institutions, two from L&T — Mr. Naik and Deosthale, four from Grasim, namely,
Rajashree Birla, Kumaramangalam Birla, S. Mishra (Corporate & HR Director, Grasim)
and D. D. Rathi. There are also two independent directors — R. C. Bhargava (former
Managing Direcor, Maruti Udyog) and Arun Gandhi (Tata Sons). Saurabh Mishra was
appointed the Chief Executive Officer of UTCC. Both Ms. Rajashree Birla and Mr.
Kumarmangalam Birla will step down from the board of L&T.
5.3 Rebranding
Grasim was having cement brands like Birla plus and Birla super in the 150 mn TPA
Cement market in India. L&T was a leading brand in the premium segment of the
cement market. The acquisition gave Grasim an entry into the premium segment of the
L&T cement which enjoyed leadership position in the premium cement market
epitomized engineering prowess, technology quality and modernity. This has enabled
the brand to command a premium over the other cement brands. Grasim was allowed 8
months to use the L&T brand.
Grasim was faced with a tough task. The time was short and there were two choices,
merge the L&T brand with existing Grasim brands or launch a new brand. The
company decided on the later and did it with style.
The name Ultratech was chosen after careful marketing research. Since L&T does not
mean anything by virtue of the brand name, Grasim wanted the new brandname to
portray significant intrinsic value of the brand. Hence the name Ultratech was chosen.
Since Grasim didnot want to dilute the premiumness that L&T enjoyed, a high decibel
ad blitz was launched to announce that L&T is now Ultratech. The campaigns was
backed with direct marketing where the company officials met the 5500 odd stockists
and authorised dealers explaining the brand and company policies.

Cement is basically viewed as a commodity and the industry is fragmented with
around 50 players. So inorder to command a premium, the brand had to show a
significant differentiation.

Ultratech was positioned as the ʹ Engineerʹs choiceʺ cement emphasizing on the
qualities such as Quality, Modernity and technology. The gamble has paid off well for
Aditya Birla group and Ultratech was able to carry the legacy of L&T cement.
6. Structuring of Deal
• Shareholders of L&T as on May 27, 2004 were entitled to 5 shares of the L&T
Engineering (Face value Rs2) and 4 shares of UCL (Face value Rs 10) for every 10
shares held in erstwhile L&T Ltd. Prior to merger Grasim held 12.6% in UCL.
• L&T transferred as promised 8.5% of its holding in UCL to Grasim at the open
Offer price, enabling Grasim to acquire a controlling 51.1% stake in UCL.
• Grasim successfully made an open offer to the shareholders of UCL to acquire
upto 30% of the stake at Rs342.6 per share.
• In addition, Rs3 per share were to be paid out of the interest on the money
deposited in the escrow account (Rs12.6bn) for the open offer. This meant a final
price of Rs346 per share was on offer to all those tendering their shares in the
open offer. The offer had opened on June 7 and closed on June 21 2004.
• Grasim Industries had arrived at an informal understanding with Larsen &
Toubro to offload 14.95 per cent out of the 15.74 per cent stake it holds in the
engineering company to L&Tʹs employeesʹ trust. According to the arrangement,
Grasim, following the demerger of L&Tʹs cement business, sold the stake to the
L&T employeesʹ trust at Rs 120 per share.

7. Financing of Deal
• Grasim Industries acquired 8.5% equity of L&T in the new cement company.
Total investment outlay was around 362 crore.
• Grasim made an open offer for 30% equity stake. Total Investment outlay at Rs.
1278 crore.
• Grasim sold its entire existing holding in L&T’s non‐cement (engineering and
other business) at Rs. 120 per share. Total cash inflow for Grasim at around Rs.
470 crore.
• Net cash outflow for Grasim on this deal will be Rs. 1170 crores. Total investment
for Grasim (including its earlier purchase from Reliance and open market of Rs.
1020 crore) around Rs 2190 crore on this deal
• The Rs. 2,200 Crore required for entire deal was funded from internal accruals of
Grasim Industries.
• This internally funded Rs.2,200 Crores transaction is the largest of its kind cash
8. Closure of the Deal
• Shareholders and Creditors of L&T approved the Scheme on 3rd Feb. 2004
• High Court approved the Scheme of Arrangement on 22nd April 2004
• Grasim deposited balance 90% of Open Offer consideration with Escrow Agent;
Total amount deposited Rs.1,279 Crs
• The scheme of arrangement for the demerger of the cement business, sanctioned
by the Honorable High Court of Bombay, became effective from Friday, 14 May,
• Accordingly, the cement business undertaking was transferred to and vested in
UltraTech CemCo Limited.

9. Subsequent performance
• ULTRATECH CemCo Ltd had reported a net loss of Rs 2.3 crore for the second
quarter and a net loss of Rs 3.3 crore for the half‐year ended September 30, 2004,
in its first reported results since its listing on the stock exchanges
The companyʹs performance has been constrained because of input costs, mainly
those of power and fuel, said a company release.
• Grasim increased exports with increase in capacity. Grasim Industries have
reported increased shipments, year‐on‐year, for both Grasim Cement as well as
UltraTech Cemco Ltd. Despatches at Grasim Cement moved up 12.54 per cent
from the year‐ago despatch quantity, amounting to 11.37 lakh tonnes. Production
increased 14.36 per cent to 11.61 lakh t.
• HIGHER sales volumes and realisations in all of its businesses have helped
Grasim Industries report a 68 per cent increase in net profit for the quarter ended
June 30, 2004. Net profit for the quarter amounted to Rs 219 crore, up from Rs
130.5 crore reported for the corresponding quarter of the previous year.
• UltraTech draws up Rs 200‐cr capex plan (Q2 2004) for the next two years that
would generate around 2.5 million tonnes of capacity through debottlenecking
and reduction of the companyʹs debt equity ratio.
• Subsequently as a result, Ultra Tech Cement reported a 76 per cent rise in net
profit at US$ 56.65 million in the last quarter of 2006‐07. Its sale of cement stood
at 3.57 mn. tons and clinker at 0.77 mn. tons. Domestic cement realisations at
Rs.3,019 per ton increased by 50 per cent. Net profit grew by 573 per cent from
Rs.32 crore to Rs.214 crore.
10. Advisors to Deal
Advisor to Grasim was Enam Securities. They helped them with valuation of company.
Transaction advisor for the deal was JM Morgan Stanley and Mulla and Mulla group
was the legal advisor.
BCG group was the advisor of L&T for a very long time. They were advised by BCG as
early as 1999 to come out of cement business gradually and focus on their more
profitable engineering and defense business.
ICRA was the valuation advisory for L&T.

11. References

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