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S. Vaidya Nathan

THE Larsen & Toubro (L&T) board of directors has to examine ways of tailoring the proposed acquisition of stake from Grasim to suit the interest of shareholders.

Grasim holds a 15 per cent stake in L&T; once the demerger of the cement business is complete, Grasim is to sell this stake to an employees' trust of L&T at Rs 120 per share. This stake can serve only as a partial protection against hostile bids.

L&T's stock price has doubled since the compromise deal was finalised in June 2003. Because of this, L&T shareholders have even more reason to expect the deal to be structured so as to benefit them.

The re-rating of the L&T stock is largely due to its strength in the engineering and construction businesses where it is the pre-eminent player.

This is also in line with the overall re-rating of engineering sector stocks across the board. As indicated in the accompanying piece, there is also scope for further gains when the engineering and construction business of L&T lists separately after the demerger of the cement business. Of the current stock price of Rs 400, the engineering business may, on a conservative basis, account for Rs 250 (62.5 per cent).

The employees trust may stand to make gains of about Rs 450 crore as the slightly less than 15 per cent stake would be worth close to Rs 900 crore.

This could get enhanced if the stock commands a higher value as a standalone engineering play.

Stocks such as ABB, Siemens and BHEL, which are comparable with L&T, trade at two-three times the value of Rs 250 per share indicated for the L&T's engineering business.

Even if the stock price, post de-merger, does not touch the lofty levels at which these stocks trade, shareholders may miss out on sizeable gains.

Also, as L&T is likely to finance the trust, at least partially, and provide its credit quality as a basis for the trust to raise funds from the market, shareholders are set to foot the bill.

There is unlikely to be any cash flow benefits now or later for L&T. In this backdrop, it is not late in the day for the L&T board to think of a shareholder-friendly structure for this deal.

For instance, the structure used when ICICI was merged with ICICI Bank is a good reference point. ICICI's stake in ICICI Bank is vested in a separate trust; as and when the trust sells shares, the profits accrues to ICICI Bank and its shareholders.

This has also helped ICICI Bank step up provisioning for the baggage of non-performing assets that ICICI brought with it.

If L&T were to use such a structure, it could even consider placing the stake with five or six strategic financial investors to avoid concentration of holdings with one entity and also reap gains in excess of 100 per cent.

The gains could shore up the shareholder fund base, which could do with such accretion to make up for the depletion due to the demerger, and which would also strengthen L&T's position while bidding for big-ticket contracts.

L&T's stock valuation would also improve and this would provide better protection to a professionally-managed company than a stake of about 15 per cent with an employees trust.

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