History of the Takeover Battle

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HISTORY OF THE TAKEOVER BATTLE

PROLOGUE

The story of the takeover battle between Grasim and L&T had its roots in anothertakeover battle in early nineties. In the late 1980s, Reliance Industries Limited (RILhad acquired 10.05 percent stake in L&T. Armed with this, RIL was aspiring to acquiL&T as a whole, and not just its cement business. Established in 1923, L&T had bee(and even today is) a truly professionally managed company with core competence inturnkey engineering projects. Acquiring L&T very well fitted in RIL s plan that wassetting up mega projects one after another.

For L&T management, however, it was a life and death issue for had RIL taken oveL&T, the top management of L&T would have certainly lost their freedom and controver the company and in all probability their jobs too. So L&T management fought bactooth and nail and managed to successfully ward of RIL attack.

The story of that battle is quite thrilling but not the subject matter of this case. It maybe sufficient to say that RIL could not manage to get support from the government,public at large and financial institutions. At that the time, the largest shareholders ofL&T were financial institutions which collectively held 40 percent stake in L&T. LIC

UTI held approx. 27 percent and the rest was held by other FIs. FIs backed L&Tmanagement and RIL had to step back.

MAIN STORY

Finally, on November 18, 2001 RIL sold its entire 10.05 percent stake (25000000 equitshares) to Grasim, an A.V. Birla group company for Rs. 766.5 crore, The price of R306.6 that Grasim paid was approx. 46 percent higher than the then prevailing market

price of around Rs. 208 210 per share.

Thereafter, an investment company that was a subsidiary of Grasim acquired another4.48% stake (1.112 crore equity shares) at an average price of Rs. 176.75 per sharetaking Grasims stake to 14.53 percent.


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Thereafter on October 13, 2002 Grasim made a public announcement of open offer toacquire 20% stake (4.973 crore shares) in L&T at Rs. 190/- per share. While Grasimhad paid Rs. 306.6 per share to RIL, it had waited for more than six months to make anopen offer. The highest price paid by Grasim for L&Ts shares in twenty six weeksprior to October 13, 2002 was only 188. 15 and the average of twenty six weeks andtwo weeks was 174.93 and 170.08 respectively. Grasim filed the draft letter of offerwith the SEBI on October 24, 2002.

On November 8, 2002 the SEBI asked the merchant bankers JM Morgan Stanley (JMMnot to proceed with the open offer since it (i.e. the SEBI) wanted to investigate thematter of an alleged violation of Takeover Regulations in regard to Grasimsacquisition of 10.05 percent stake from RIL. Grasim, ON November 18, 2002, preferrean appeal the Securities Appellate Tribunal (SAT) against the SEBI order and gave public notice to that effect on November 20, 2002. Thereafter the investigation by theSEBI went on till almost third week of April 2003.

Meanwhile in December 2002, L&T management tried to outsmart Grasim by mootingproposal to carve out its cement business into a subsidiary wherein L&T would havretained around 75 percent stake and the shareholders of have got balance 25 percentor so. This would have brought down Grasims direct stake in the cement business

to about 3.75 percent as against its 14.53 percent stake in L&T. Grasim managed to geta stay from the court on this proposed de-merger.

Further, on January 27, 2003 Grasim made a counter proposal of vertical de-merger ofcement business to L&T board, Grasim valued L&Ts cement business at Rs. 130/ -per share and engineering and other businesses at Rs. 162.5 per share thereby valuingL&T as a whole at Rs. 292.5 per share. Grasim also proposed that upon de-merger itwould like to make an open offer to acquire control the cement business / company.

By April 2003, the SEBI came to conclusion that Grasim had not violated TakeovCode, and that its offer was valid subject to making some additional disclosures. TheSEBI then offered its comments to the draft letter of offer of Grasim on April 22, 2003Finally Grasims open offer for L&Ts 20 percent stake opened on May 7, 2003

and closed on June 5, 2003. Grasim, accordingly, withdrew its appeal before SAT.


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The offer failed miserably and Grasim could get only 9.44 lac shares or 0.38% stake inthe open offer. However, post announcement of open offer, Grasim, through itssubsidiary, had purchased another 20.56 lac shares or 0.83% stake from the openmarket thereby taking its total holding to 15.73 percent of L&Ts e quity capital. Thispaved way for Grasim to make creeping acquisition without making an open offer aalso to get board seats on L&Ts board.

Thereafter, in June 2003 itself the L&T management and Birlas hammered out a deal tocarry out a structured de-merger of cement business of L&T and about further termsand conditions of Grasims takeover of control of the resultant cement company.

THE DE-MERGER DEAL

With effect from April 1, 2003, the cement business of L&T was vested in a separatecompany (UltraTech Cement Limited). It was decided that post de-merger, Grasim wiacquire the control of the resultant cement company. However, L&T managed to retaincertain key assets like L&T brand, ready mix cement (RMC) business, the gas poweplant in Andhra Pradesh, and the entire residential and office property of the cementdivision.

As a part of the scheme of de-merger / arrangement, L&Ts equity capital of Rs,248.67 crore, consisting of approx. 24.88 crore shares of Rs. 10/- each was reduced.L&Ts paid up capital was brought down to Rs. 24.88 crores consisting of 12.44

crore shares of Rs. 2 each. Accordingly shareholders of L&T received one share of R2/- face value of new L&T for every two shares of Rs. 10/- face value of old L&T.

UltraTechs paid up capital was fixed at Rs. 124.91 crores consisting of approx.12.49 crore shares of Rs. 10/-face value. L&T was allotted 20 percent of UlraTechsequity.

The remaining 80 per cent was allotted to shareholders of L&T in the same proportionas the stake held by them i.e. for every five shares held in L&T shareholders got twoshares of UltraTech. With this Grasim would receive approx. 12.5 percent stake inUltraTech against its 15.73 percent stake in L&T.


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It was decided that out of L&T's 20 percent stake in Ultra Tech, L&T will sell 8percent stake to Grasim at a price of Rs. 171.30 per share as against the earlier offer of Grasim at Rs. 130/- per share. With this, Grasim will hold approx. 21 per cent inUltraTech. Grasim would then make an open offer for 30 percent of the UltraTechs

equity at the same price and would take its stake to 51 per cent. The open offer by Grasim was meant for not only taking control of UltraTech, but to

give a chance to FIs to bring down their stake, in the process making hefty capitalgains.

In subsequent developments, Grasim bought L&Ts stake actually at Rs. 342.60per share and made an open offer at the same price. Grasim, thus, had to shell out Rs.362 crores to L&T and Rs. 1298 crores in the open offer.

It was also decided that the residual stake of L&T in UltraTech of approx. 11.5percent would be liquidated by L&T in small trenches and to non cement entities by2009, if Birlas do exercise their right of first refusal in negative.

In turn, Grasim sold approx. 14.93 percent of its 15.73 per cent stake in L&T to anemployee's trust of L&T at Rs 120/- per pre de-merger share or Rs. 240/-per post de-merger share. The remaining approx. 0.8 percent would be sold when the employeetrust would dilute its stake by 1 percent or so.

BIRLAS MOTIVE

Why were Birlas so desperate to acquire L&T? As on 31st March 2003, the total cement capacity in India was approx. 135 mn tonnes.There were over 400 plants in the country consisting of 120 or so large plants and therest mini cement plants. In terms of company wise capacity, L&T had the largest

capacity of 18mn tonnes, followed by ACC at 15 nm tonnes, Grasim at 13 mn tonneand Gujrat Ambuja at 12.5 mn tonnes. In acquiring L&Ts cement business, Birlas

had a simple motive of growth through acquisition. After acquisition the

combined capacity of Grasim and UltraTech went up to 31 mn tonnes, making Grasimthe largest producer in India and the eighth largest in the world.


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L&T was also considered as a premium brand and used to fetch higher price. Thoughthis brand would not be available to Grasim in the long run, L&T allowed Grasim to uit for more than a year post acquisition. Later on, through an ad blitzkrieg Grasimmanaged to transfer brand equity of L&T cement to UltraTech cement.

While Grasim was strong in the Southern markets, L&T was strong in the rest of IndiaL&Ts strong distribution network was very vital to Grasim to push its own brands

also.

Last but not the least, around 2002-03, the economy had just started coming out of woods. Stock markets were still bearish and valuations low. A look at Exhibit 1 tells u

that in 2003-04, the first post de-merger year, on the gross turnover of Rs. 2700 crore,UltraTech posted a PBT of just Rs. 49.20 crore. In fact, considering that otherbusinesses of L&T grew by 32 percent in 2003-04, engineering division turnover 2002-03 would have been around Rs. 7500 crore and that of cement division aroundRs. 2000-2100 crore. Cement division must have made losses in 2002-03. HoweverBirlas were aware that in the next immediate 4 to 5 years cement business would turnhighly profitable and valuations would skyrocket. So they were in a hurry to acquir

while they could still get it cheap.

WHY L&T SURRENDERED

The first and foremost reason was survival. At the time RIL tried to takeover L&T, Fhad backed L&T management to control over L&T. However, this time around thsituation was a bit different. It is believed that while the open offer for L&T was goinon, Birlas had succeeded in convincing FIs about the structured vertical de-merger andabout FIs selling their shares in the resultant cement company either directly or throughopen offer. It is also believed that, if L&T management had continued to be adamantabout not agreeing to vertical de-merger, FIs were willing to sell their stake in L&T toBirlas provided the price was right. Also, now Birlas could up their stake in L&Tthrough either creeping acquisition or through another open offer. So in order to keep


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their control over L&T, which by then was a ten thousand crore empire even sanscement, L&T management had no choice but to agree to give away the cementbusiness.

However, having accepted this fate accompli, L&T management did a very good job onegotiating. They managed to retain ready mix cement business and other key assetsof the cement division as stated earlier. They also managed to allot to L&T 20 percentof the new companys equity and sold 8.5 percent stake at a whopping Rs. 362crore. Considering that the first offer of Birlas was for Rs. 130/- per share of cementcompany (including RMC business and all assets), the price of Rs. 346.60 per share waextremely good at that time. They also got for themselves time upto 2009 to sell the

balance 11.5 percent. Considering that during October 2007, UltraTech share crossedRs. 1100/-, this was a very good negotiation on behalf of L&T management. Also themade Birlas sell approx. 14.95 percent stake at Rs. 120/-per share to employeeswelfare trust, in the process achieving two things getting Birlas off their backs

permanently and increasing their own stake without having to shell out any money fromtheir own pockets.

L&T management also used de-merger to strengthen L&T balance sheet. (See Exhibi2).

In de-merger, L&Ts paid up capital was reduced to 10 percent of what it was priorto de-merger. The number of equity shares was reduced to half and face value to onefifth. This resulted into EPS shooting up.

In de-merger, while L&T had to transfer reserves worth approx. Rs. 790 crore to

UltraTech, and L&T also suffered loss of paid up capital of Rs. 225 crore, debtamounting to Rs. 1900 to 2000 crore got transferred to UltraTech, due to the formulaof splitting common loans specified under section 2 (19AA) of the Income Tax Act, 19which is mandatory if the de-merger has to be tax neutral. Due to this L&Ts Debt:Equity ratio sharply improved to 0.5: 1.


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All in all the deal had a lot of positives for L&T and its management. However, a look the performance of UltraTech for the year 2007-08 (see Exhibit 1) will show that thereal winners were Birlas and not L&T.

Documents

History of the Takeover Battle