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L&T: What is in the pipeline

S. Vaidya Nathan

SHAREHOLDERS of Larsen & Toubro would have to brace themselves for significant strategic possibilities with the open offer by Grasim set to close this week. What are the possibilities that lie ahead for L&T and its shareholders:

Status quo, remote: The likelihood that L&T will remain in its present shape two to three years from now is remote. Changes are more likely to happen sooner than later. The continuance of status quo is unlikely to unlock value for L&T shareholders who have now waited for about four years for a decisive move.

Hostile bid unlikely: The other strategic possibility that is increasingly become distant is a bid by global cement majors such as Cemex, Holderbank or Lafarge. The presence of Grasim, with a stake of about 15.3 per cent, which is likely to go up a few percentage points after the ongoing open offer, is likely to deter any serious hostile bid. The rather warm approach of the financial institutions to Grasim — evident from their disinclination to get Grasim to pay a better price — is also likely to act as a deterrent to MNCs.

The global cement majors may also not prefer to bid for the whole of L&T. If they have an idea of engaging in a battle with Grasim at all, they may prefer to do when the cement business is demerged.

Cement de-merger: Going forward, this is the most certain aspect as far as L&T goes. Yes, the demerger is certain but the route and the form it will take is uncertain. There are two alternative proposals:

  • L&T's own idea is to demerge the cement business, offer 25 per cent in the new company to its existing shareholders, 37.5 per cent to a strategic partner (preferably through competitive bidding) and 37.5 per cent to be held by itself.

  • Grasim's plan calls for a demerger and a distribution of the entire equity of the cement company to L&T shareholders.

    As long as Grasim has a sizeable foothold in L&T's equity and has the support of financial institutions, the L&T plan appears unlikely to go through. If the L&T plan does go through, it could impose a serious financial burden on Grasim. The close to Rs 1,000 crore forked out to buy a 15.3 per stake would get converted into just a 3.8 per cent stake in the cement company.

    Grasim would have to face searching questions on its investment strategy if it ends up with such a small and meaningless stake in the cement business of L&T. Then, Grasim would also have to bid for the 37.5 per cent. In hectic competition, the price will be much higher than the Rs 130 per share value placed by Grasim on L&T's cement business. So, Grasim would prefer to do everything to scupper this plan and push its version of the demerger. The passivity of the financial institutions suggests that this may the likely outcome as well.

    Grasim's preferred demerger: This route will ensure that Grasim gets the same proportion of holding in the cement company as it has in L&T as a whole. Its intent has already been made clear: If the demerger takes this route, expect a voluntary open offer from Grasim at Rs 130 per share.

    Its costs would be lower than what it would have forked in the ongoing open offer (which is a mandatory one under the SEBI takeover code).

    If the demerger happens, one can expect Grasim to act as swiftly as it can to prevent any hostile bidders from throwing their hat into the ring. For the same reason, Grasim would also prefer to push for a demerger at the earliest. It would want to sew up the issue beyond doubt even as global majors cope with profitability problems and tackle costs of global level acquisitions (such as Lafarge's buyout of Blue Circle Victor).

    Consolidation looms: The demerger is eventually bound to lead to a consolidation of Grasim and L&T's cement capacities. Unlike ACC, where Gujarat Ambuja has major compatibility problems for a merger, Grasim will have no such issues with L&T. Both have fairly contemporary capacities, good geographical spread, brand equity and operating efficiencies that are not very different from each other. The markets may also view a merger of the cement capacities into a single company favourably.

    Non-cement business: Assuming Grasim gets hold of L&T, it may keep open the options of getting out of the non-cement business at a time of its bidding. It has the strength to wait for an opportune time to sell and maximise the value of its holding at the time of sale.

    This would be good for other shareholders who may find they get the benefit of a strong seller at least then (a facet they miss now as Grasim bids for their company at a throwaway price).

    This would ensure that shareholders get an attractive price in the open offer that would be made by the acquirer. Even if Grasim decides to stay put, shareholders may get better value than what they do in the woefully under priced offer that is open now.

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