Corporate Ferocious Battle

Grasim v/s Larsen & Toubro

PRESENTED BY:

Vikram Gade – 10
Arush Jain – 16
Shivani Mandani – 25
Smita Shelar – 45
Tejashree Shirodkar - 46
 Why MERGERS???

SCENARIO 1 SCENARIO 2 SCENARIO 3

WINNING SCENARIO
MERGER – DEMERGER – DIVESTITURE – SPIN OFF

DEMERGER:
A corporate strategy to sell off subsidiaries or divisions of a company.

DIVESTITURE:
For a business, divestiture is the removal of assets from the
books. Businesses divest by the selling of ownership stakes, the closure of
MERGER – DEMERGER – DIVESTITURE – SPIN OFF

SPIN OFF:
The separation of a subsidiary or division of a corporation from
its parent by making it a new corporate entity, an independent
company through the sale or distribution of new shares of an
existing business/division of a parent company. Businesses
wishing to 'streamline' their operations often sell less productive,
or unrelated subsidiary businesses as spinoffs.
• In 2003 United Breweries de-merged itself into two
companies United Breweries (the beer company) and UB
Holdings (the property and investment play).

• Aptech’s software development division was spun off as a

separate company under the name of Hexaware.
 INDIAN CEMENT INDUSTRY
• India is the second largest cement producer in the world with a total
capacity of 151.2 Million Tones (MT).

• With the government giving boost to various infrastructure projects,

housing facilities and road networks, the cement industry is currently
growing at an enviable pace.
• In spite of being the second largest cement producer, India has the
lowest per capita consumption of cement with 125 kg. This is
because the poor rural people mostly live in mud huts and cannot
afford the commodity. Despite the fact, the demand and supply of
cement in India has grown up.

• In a fast developing economy like India, there is always a

large possibility of expansion of cement industry.
 INTRODUCTION
• The corporate feud was fought by Grasim to apply the rule of
3 and for L&T it was a battle for survival.

• The case revolves around how Grasim, a leading Indian

business conglomerate, gained control over the cement
business of L&T through manipulating stake percentages.

• It highlights the ambiguity in India's stock market regulatory

authorities with respect to insider trading, the open offer chaos
and takeover code violations and finally reaching conclusions
by interventions of outsider parties.
Larsen & Toubro
• L&T was founded in Mumbai in 1938 by two Danish engineers,
Henning Holck-Larsen and Soren Kristian Toubro. Both of them
were strongly committed to developing India's engineering
capabilities to meet the demands of industry.

• It is one of India’s largest engineering and construction (E&C),

cement company, having a strong presence in IT and financial
services.

• E&C business being its mainstream activity contributes to 60% of

company’s total revenue.
Grasim
• Grasim Rayon, an Aditya Birla Group undertaking, specializing in
manufacturing of man made fibers came to existence in 1947.

• The company mainly operated in VSF (viscose staple fiber), cement,

sponge iron, chemicals and textile business.

• It was India’s lowest cost manufacturer of VSF with the capacity of

220775 tonnes p.a. and a domestic market share of 90% and
globally 24%.

• Grasim in 2001 was ranked 10th amongst India’s private companies

in terms of sales and assets. With increasing profitability Grasim
was on an acquisition spree and was exploring various options to
expand its business.
 CEMENT COMPARABLES
COMPARABLES GRASIM L&T

• Revenue 46 % 26%

• Industry Position 3rd largest Largest

• Number of plants 12 10

• Production capacity 13 MTPA 18 MTPA

 L&T - SPIN OFF

REVENUE: 60% 14% 26%

 CASE LANDMARKS
Rs. 766.5 crore @ 306.6 per share

18th Nov 2001 : RIL sold its entire 10.05 % stake to Grasim.

4.48% stake @ 176.6 per

share

By Sept 2002 : Total stake of Grasim = 10.05% + 2.84% + 1.59% = 14.48%

20% stake @ 190 per

share

13th Oct 2002 : Grasim made a public announcement of an open offer.

 CASE LANDMARKS
18th Oct 2002 : Two of the FIs – Life Insurance Corporation and General
Insurance Corporation, together holding 27% of shares in the
company, declined to participate in the offer.

End Oct 2002 : Investor Grievance Forum(IGF) filed a complaint with SEBI
accusing Reliance of violating takeover code and also of insider
trading for procuring L&T’s shares.

08th Nov 2002 : SEBI issued a stay on the open offer asking the merchant
banker JM Morgan Stanley not to proceed with the open offer
since they wanted to investigate the matter of an alleged
violation of takeover regulations. Grasim then filed an appeal
with SAT challenging SEBI’s decision.
 CASE LANDMARKS
By Nov 2002:

STRUCTURAL DEMERGER VERTICLE DEMERGER

L&T Grasim

L&T All L&T shareholders’ stake in

new cement company
= 76%
(+) FIs =
Existing proportion of their
(+) Existing Shareholders= 24% respective stakes
 CASE LANDMARKS
End Nov 2002 : SAT ruled against Grasim’s petition against SEBI and directed
Grasim to stop purchasing L&T shares from the market until its
next order.

Dec 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.
 CASE LANDMARKS
CDC’s PROPOSAL: Grasim’s PROPOSAL:

 Convertible Debentures with  Second Public Offer for

6.8% equity stake acquiring 20% stake

 Strike Price was fixed at Rs. 158  Offer Price fixed at Rs. 130 per
per share share

 Drag – Along Clause

 FIs announced their support to
vertical demerger plan
 Right to veto
 CASE LANDMARKS
By Feb 2003: IGF asked L&T to appoint an outside expert to evaluate both the
investment proposals. Therefore, L&T appointed ICRA to do the
needful.

By Apr 2003: SEBI came to a conclusion that Grasim had not violated takeover
regulations and that its offer was valid subject to making some
additional disclosures.

Offer finally opened on May 7th and closed on June 5, 2003 at a

price of 190 per share.

The offer failed miserably and Grasim could get only 0.38 % stake
in the open offer. However, post announcement through its
subsidiary, it had purchased another 0.83% stake from open
market taking its total holding to 15.73%.
 CASE LANDMARKS
By May 2003: ICRA announced 3rd alternative restructuring plan, which was largely based
on Grasim’s plan only. However, the shareholding pattern in the new cement
company was altered as:

0%
100% 8

20%

L&T wasn’t convinced about the plan, didn’t wanted to adopt it. Following this, L&T sought

the advice of GURUMURTHY…

 DEMERGER DEAL
As proposed by Gurumurthy:

01st Apr 2003 : The cement business of L&T was vested in a separate company
“UltraTech Cement Ltd” and its paid up capital was fixed at 124.91
crores .

L&T accepted ICRA’s 80:20 plan and Grasim would sell all its
holdings in L&T’s engineering division back.

w.e.f. 1st Apr : It was decided that post merger, Grasim would acquire the control of
the resultant company. As a part of scheme of demerger, L&T’s
equity capital of Rs. 248.67 crores was reduced to 24.88 crores.
 DEMERGER RATIO
• As per the demerger ratio for every 2 shares held in L&T, the
shareholder was given 1 share in the New L&T.
• At the same time for every 5 shares held in L&T, the shareholder
was given 2 shares in the demerged cement company –
UltraTech.

What happened if you had 100 shares in L&T?

If you had 100 L&T shares, you will now have…
– 50 shares in the New L&T and
– 40 shares in the cement company – UltraTech
 DEMERGER DEAL
8. 5% 30%
L&T GRASIM PUBLIC OFFER

Rs. 171. 3 Rs. 171. 3

20% per share 17% per share

11. 5% 55. 5%

Grasim bought L&T’s stake at Rs. 342.60 per share and made open offer at
the same price. This doubling of price was on account of the fact that as
against the 24.88 crores shares of L&T prior to its demerger, Ultra had issued
12.49 crore shares i.e. approx half the no. of shares.

It was also decided that the residual stake of L&T in Ultra of approx 11.5%
would be liquidated by L&T in small trenches and to non – cement entities by
Dec 2009, if Birla's do exercise their right of first refusal in negative.
 POST - MERGER
The pattern of shareholding in the new formed entity:

ULTRATECH CEMENT

19%
GRASIM
L&T
51% FIs
18% PUBLIC

12%
• Samruddhi Cement Limited amalgamated with
UltraTech Cement Limited in July 2010
5.
• Cement business of Grasim demerged and
vested in Samruddhi Cement Limited in May
4.
2010
• Narmada Cement Company Limited
amalgamated with UltraTech in May 2006
3.
• UltraTech Cement Limited has an annual
capacity of 48.8 million tonnes with 11
2.
integrated plants.
• The Aditya Birla Group is the 9th largest
cement producer in the world.
1.
ULTRATECH - TODAY
 WHO GAINED WHAT??

SHAREHOLDERS
COMPANY EQUITY AVERAGE SHAREHOLDERS’
SHARES PRE – DEMERGER WEALTH
SHARE PRICE
L&T 100 287.18 28718

COMPANY EQUITY AVERAGE SHAREHOLDERS’

SHARES POST – DEMERGER WEALTH
SHARE PRICE
L&T 50 745 37250
ULTRATECH 40 265.95 10638
CEMENT
TOTAL SHAREHOLDERS’ WEALTH AFTER MERGER 47888

INCREASE IN WEALTH 47888 - 28718 = 19170

 WHO GAINED WHAT??

L&T
• Demerged L&T would come across as a focused engineering
and technology company.

• Post demerger company was able to reduce their debt

substantially. The target debt equity ratio of about 0.75 was
achieved.

• L&T will have a capability of bidding for around Rs. 10,000

crores worth of projects every year after the demerger .

• The demerger deal would help meet L&T’s requirement of

sales to net worth ratio required to bid for international
projects is around 3:1.
 WHO GAINED WHAT??

GRASIM

• In acquiring L&T’s cement business, Birla’s had a simple

motive of “growth through acquisition”. After acquisition
combined capacity of Grasim and UltraTech went up to 31
million tonnes, making Grasim the largest producer in India
and the eighth largest in the world.

• Cement generates more immediate cash flows compared to

other business contracts.

• Grasim was strong in the southern markets, L&T was strong in

the rest of India. L&T’s strong distribution network was very
vital to Grasim to push its own brand also.
 CONCLUSION
Any business preposition should be clearly analyzed before making
any move. The ultimate purpose of any business activity is to
maximize the shareholders’ wealth because:

“A great company is not the one which makes millions,

but it is the one which makes its people millionaires”…

 ! ! !
YOU
N K
THA