Financial Daily from THE HINDU group of publications
Saturday, Dec 21, 2002
Grasim faults CDC proposal to invest in L&T's demerged biz
MUMBAI, Dec. 20
GRASIM has contended that the terms of Commonwealth Development Corporation (CDC)'s offer to invest in the demerged cement business of L&T is not in the interest of L&T's shareholders.
Grasim which has a 15 per cent stake in L&T, is believed to have argued that CDC proposal is "just high cost debt masquerading as equity''.
Whereas L&T believes that the proposal has been negotiated keeping in mind the company's future growth prospects and therefore fetches its shareholders the best valuation for its cement division.
"We are not the buyer who would naturally look for the lowest valuations, we are the seller looking for the best valuations.''
The CDC proposal is expected to be taken up by the board of L&T at its meeting later this month.
L&T believes that the proposal keeps in mind future growth prospects of the cement company given the current depressed cement market conditions, therefore fetching the highest valuation it can at this point of time.
Sources said the proposal is for FCCBs worth $60 million, carrying a coupon rate of six per cent on dollar terms. On conversion (optional) in December 2004, this will lead to a 6.8 per cent equity stake in the cement company for CDC.
Grasim is said to hold that since this works out to 10 to 11 per cent coupon rate in rupee terms, L&T can easily better this by raising money from the domestic debt markets.
Grasim has also apparently said that $60 million for a 6.8 per cent stake would mean an equity value of more than Rs 4,000 crore, which market capitalisation figure the cement division is unlikely to reach in December 2004. A lower value on the conversion date could mean that CDC may elect not to convert the debt into equity.
Sources said Grasim's complaint could be a precursor to a possible proposal of its own, bettering CDC's proposal, for L&T's cement division.
L&T apparently argued that the proposal may be described as debt, but that CDC are not lenders but equity investors, that what L&T is getting is quasi-equity which can be leveraged for raising more funds which would otherwise be difficult given the dreary cement market of today.
L&T apparently argues it this way; that for the buyer such as Grasim who would be looking for the cheapest buy, paying or getting funds for L&T's cement division at current rates would be most attractive.
"However 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.''
L&T apparently thinks that the market cap figure of Rs 4,000 crore is eminently within reach - that the depressed market conditions and absence of new capacity creation can only drive cement prices upward in the future, "a 20 per cent increase in cement prices by December 2004 is very much reasonable to assume''. In addition, there would be new capacities which would be bought out by L&T using the funds raised from CDC.
L&T is said to hold that the investor being an equity investment company which is looking at a five-to-seven-year tenure, CDC would look for returns in the region of around 20 per cent at exit time.
Grasim has also found fault with the various clauses in the CDC proposal; such as the one which allows CDC tag along rights to 45 per cent of L&T's stake in the cement company with CDC's own stake and to call for global bids if it is not satisfied with the market rate; such as that if L&T should decide to sell, then CDC's 6.8 per cent would tag along and get first preference for sale; such as that in case of violation of a number of clauses and conditions, L&T would have to repay at IRR of 15 per cent on dollar terms to CDC.
L&T holds that since the investment has been made at such a high valuation, the other features of the proposal are present as hedge and insurance against anything going wrong and that this is formal to any such proposal.
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