The Hindu Business Line : Grasim open offer for L&T's Cemco on June 7

THE stage appears to be set for the birth of the seventh largest cement producer in the world, with Grasim Industries' open offer for 30 per cent stake in UtraTech Cemco, the demerged cement business of Larsen & Toubro, scheduled for a June 7 start and a June 21 close. The high profile and impediment-ridden acquisition of Cemco by Grasim appears to be nearing the finishing line, with today being the effective date for Cemco's demerger, when it becomes a separate entity from L&T.

Cemco of course, would still be an unlisted company, but the scheme of arrangement between Grasim and L&T provides that the open offer shall be made before Cemco's listing on the stock exchanges.

Both Grasim and Larsen & Toubro have opened escrow accounts for the necessary amounts — the former for the acquisition of 8.5 per cent share in Cemco and the latter for buying out Grasim's stake of over 14 per cent in Larsen & Toubro through an employees' trust.

Escrow arrangements for the full amount of Rs 1,279 crore against the 30 per cent open offer has been made by Grasim, said officials at the company.

The equity shareholders of L&T will be issued one equity share of L&T of the face value of Rs 2 each for every two equity shares held and two equity shares of the face value of Rs 10 each in Cemco for every five equity shares of face value of Rs 10 held.

At Grasim, officials took pains to point out that the offer price of Rs 342 per share is attractive to L&T shareholders ( L&T share closed at Rs 513.35 on the BSE today.)

"At Rs 342 per share, UltraTech needs to earn profit after tax of approximately Rs 300 crore for earnings-per-share of Rs 20 and P/E of 15," he said. "That is far from the reality of today," said Mr D.D. Rathi, Chief Financial Officer, Grasim Industries.

Given Cemco's current profitability, and its debt of Rs 1,750 crore at an interest rate of 8 per cent, there is really little profit in the company for nine months, and its return on capital employed is just 3 per cent, he said.

"It is on account of its potential that we have bought it," he added.

Grasim would, in the event of a successful open offer, acquire majority stake in Cemco and would be in charge of a capacity of nearly 31 million tonnes (mt), he said. L&T's has unutilised capacity of 2.5 mt out of its total capacity of 16.5 mt. "Our first target would be to increase utilisation," said Mr Rathi, adding that Grasim's capacity utilisation is 90 per cent.

Grasim would have spent Rs 2,200 crore in the acquisition of majority stake in Cemco. "The equity value of that business would be Rs 4,400 crore."

Trading in shares of L&T will be suspended from May 20 on account of the scheme of arrangement, said L&T in its announcement to the stock exchanges today.

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