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Wednesday, Oct 16, 2002

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Grasim's open offer for L&T: Open season for revamp

S. Vaidya Nathan

THE open offer for Larsen & Toubro (L&T) should see Grasim Industries well and truly in the driver's seat as far as `control' goes. The stance of the financial institutions may not count for much in this exercise as they may not be able to demand 100 per cent open offer coverage of the Raasi Cements' kind. .

Going forward, much interest would center on the shape that the restructuring exercise between the two companies and Indian Rayon could take.

Restructuring looms large: Grasim is unlikely to shell out close to Rs 1,800 crore for 34.5 per cent just to have a controlling say in L&T. The returns would not be good enough to maintain this position for long. Within the next 12 to 18 months, it is quite likely that we could see major changes involving L&T-Grasim-Indian Rayon.

Expect a de-merger of the cement businesses of L&T and Grasim and then a merger of the two into a separate company. Buying out L&T's cement business may not be possible as it could entail a large equity expansion. FIs may also resist such a move. Just merging the cement business of L&T into Grasim might also not provide better valuation for the Grasim stock .

The kick for valuation may well lie in the combined cementbusiness as a listed entity. The merged cement entity would have a capacity of around 27 million tonnes, placing it just ahead of the Gujarat Ambuja-ACC combine for now. What Grasim may do is to retain its monopoly business - Viscose Staple Fibre - in this fold as it could provide steady cash flows to counter likely sluggishness in cement.

The process may also lead to the ready-made garments, fabrics and textile business of Indian Rayon and Grasim coming under one fold. L&T's engineering and construction business with the insulators business of Indian Rayon would be large enough to command good valuation .

The IT businesses of the three companies may also come under one roof (Indian Rayon controls PSI Data Systems). Over a longer period, a rationalisation of the subsidiaries/joint ventures of L&T is also a possibility .

Decisive upfront: By striking out to take charge of L&T, Grasim has moved decisively to the top table in the cement industry. The cement business of L&T has been the main attraction for Grasim with the residual businesses just the icing on the cake.

By resisting the temptation of waiting out three years to escape open offer requirements, Grasim has also ensured that there is no hostile threat to its initial move on L&T when it picked a 10 per cent stake from Reliance at Rs 306 per share.

But it has waited long enough to be able to link its open offer price to the market price of L&T rather than the higher price paid to Reliance. It has in the process saved around Rs 600 crore. The eventual acquisition cost of around Rs 1,800 crore means an average price of around Rs 230 per share, which is very attractive from Grasim's point of view.

To get a perspective on what this deal means, sample these numbers: For a price tag of Rs 1,800 crore Grasim has taken control of 17 million tonnes of capacity along with the other businesses of L&T . Any rationalisation exercise would cut costs further for Grasim.

L&T's capacities are concentrated in Maharashtra, Andhra, Karnataka, Gujarat and eastern India where Grasim does not have a major presence. The footprint of fairly contemporary capacities with good operating margins would cover all key markets giving Grasim a distinct advantage.

Comfortable financing: Grasim's financial strength should enable it to go through the open offer using debt and internal accruals. The comfort lies in the fact that it has tapped equity only once through the GDR offer in the last 12 years and has a small equity base of Rs 91 crore. This gives the flexibility to also go for a small equity offering at close to the market price and cut any debt burden that it may take now.

It would also leave it free to explore further greenfield expansion without resource constraint. Overall, the move is a win-win for Grasim in the long term but a painful one for L&T shareholders as control is being passed on without Grasim paying a premium for it.

What will Gujarat Ambuja do?

THE interesting spin-off effect of this Grasim open offer for L&T will be on what strategy Gujarat Ambuja Cements will now use. Now that Grasim has effectively moved to seal its hold over L&T, Gujarat Ambuja cannot afford to wait on ACC where it has a 14.4 per cent stake.

This still leaves the door wide open for a hostile bid by an MNC on ACC. The financial institutions - after the L & T experience - may also not play ball with Gujarat Ambuja in such a situation. They may rather opt for an attractive price that may come along with any hostile bid.

Helped by a benevolent SEBI stand in court (that its stake acquisition from Tatas did not involve a change in control), Gujarat Ambuja has almost waited out the three-year period that would help it escape the rigours of the takeover code. But now its hands may be forced if it is to strengthen its hold on ACC.

Its only advantage is that it can have an open offer linked to ACC's market price in the last six months. This may work out to around Rs 140 per share, substantially below the Rs 370 per share paid to the Tatas.

The slightly problematic area may be that it may not find an open offer as comfortable to handle as Grasim. More so with its warrant holders not opting to convert to equity leaving it loaded with debt it had hoped to replace through such conversion.

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