L&T: Restructuring the Cement Business
L&T Restructuring the Cement Business
What factors motivated Grasim to acquire RIL’s stake in L&T at a hefty premium
Was the open o!er price of Grasim Reasona"#e
Wi## the proposed de$merger un#ock the shareho#der va#ue of L&T
L&T Restructuring the Cement Business
What are the options "efore L&T %hareho#ders
Wi## the proposed acquisition change the industry dynamics
o' 'i## you (ustify the ro#e of various stakeho#ders in the episode
)eterminants of *a#ue Return Growth
Cash Flow
Capital Risk
Company Value Cost of Capital
+atching 'ith ,irst -rincip#es Reduce Risk Restructuring enhance va#ue through strategies that///
.nhance #ife of assets 'ith potentia# .nhance gro'th of assets 'ith potentia#
The *a#ue Creation +atri0 ,inancia# )imension
+anageria# )imension
1Redep#oy capita# 1Increase R2I
1Improve management 1Rep#ace ine3cient one
Risk )imension •Cost of capital •reduction
Value Creation
+arket *a#uation
2perationa# )imension •Scale Economics •Improve margins
)e$merger -#acing *a#ue in the %hareho#ders’ ands
)e$merger Concept %hareho#ders %hareho#ders
Company Company 4B 4B
%hares
)e$merge
Company Company B B
Business 4 Business B Business B
-ost )e$merger %hareho#ders %hareho#ders Shares
Company 4B Business Business 4 4
Company Company B B
)e$merger $ The 4ptech Case Immediate results
+arket Capita#i5ation in Rs/ crores
16!6
4pp#e
7=9/9 7=9/9
"#"
%$67/7 67/7
4ptech
89/: 89/:
4pp#e;,inance <
L&T )e$merger of Cement )ivision Background % shar e
Cost Per Share
-urchase of L&T from RIL ;at 96? premium< on @ov/7A =7 -urchase of L&T from 2pen +arket
Total (Rs/Cr )
7/:
DE/E
66E
:/E:
7EE/:
=D9
!"#
$$
L&TF Restructuring the Cement Business
2cto"er 79 ==F 2pen o!er for =? equity of L&T at Rs 78 per share ;at 7? premium< %hareho#ding -attern of L&T at the end of %eptem"er == LIC ;7A/E? stake
Banks ,Is Insuranc e
=E/:D? Grasim
79/7:?
+utua# ,unds HTI
77/8A? Indian -u"#ic
D7/EA?
,IIs
E/D:?
/6:?
-rivate Corporat e Bodies
7A/A? 2thers
@RIs
9/ED?
Response of L&T +anagement
-rice 'as not "enecia# to the shareho#ders of L&T Worried over #osing contro# over the company 4pproached ,Is to oppose the open o!er L&T *a#uation at c#ose to Rs D a share (Business Standard, November 15, 2002)
Jumar +anga#am Bir#a’s Response “… The main objective of the oer is to brin! do"n the #rasim $ndustries% cost of ac&uisition of the cement and en!ineerin! major' Sharehoders of *T have severa o+tions' The !rou+%s o+en oer for arsen * Toubro is not a mandator oer, and hence *T sharehoders are free to decide "hether the "ant to acce+t the oer +rice…'Ta.e it or eave it, sas Bira on *T /er' Business Standard, November 22, 2002
Indian Cement Industry
Large#y fragmented 'ith an insta##ed capacity of 7D +T-4 as on +arch D7 == 7= cement p#ants & :9 companies L&TF 7E +T-4 Grasim IndustriesF 7=/8 +T-4 4m"u(a GroupF 7=/: +T-4 4CCF 79/8D +T-4
igh #everage de"t$to$equity ratio of =/D=F7
-ossi"#e %ynergiesF Grasim & L&T Com"ine
Considera"#e presence in the 'estern & southern markets
2perating costs reduction
C#uster that consume 9=? of tota# cement Grasim & L&T com"ine 'i## "e num"er 7 L&T -#ants have #o' costs per ton of cement Better #ogistics and inventory management
.nhanced ,inancia# ,#e0i"i#ity
C)C Capita# -artners -#an
L&T Cement )ivision
6? stake 'ith L&T =:? stake 'ith L&T shareho#ders :? stake 'ith C)C Capita# -artners
*a#uation of Cement "usiness
K6: per ton or Rs 7:E$7:A per share
*a#uation +ethodo#ogies
Re#ative va#uation using +arket +u#tip#e 4pproach
)iscounted Cash ,#o' ;)C,< +ethodo#ogy
Rea# 2ptions
Re#ative *a#uation +arket +u#tip#e 4pproach
+u#tip#es of earnings paid
-urchase price per share Target’s fu##y di#uted .-% "efore e0tra$ordinary items
+u#tip#es of cash Mo' paid
-urchase price per share Target’s fu##y di#uted C,-% "efore e0tra$ordinary items
Re#ative *a#uation +arket +u#tip#e 4pproach
+u#tip#es of .BIT paid
;4ggregate purchase price of equity N +arket va#ue of de"t assumed< Target’s .BIT "efore e0tra$ordinary items
+u#tip#es of .BIT)4 paid
;4ggregate purchase price of equity N +arket va#ue of de"t assumed< Target’s .BIT)4 "efore e0tra$ordinary items
Re#ative *a#uation +arket +u#tip#e 4pproach
+u#tip#e of "ook va#ue paid
-urchase price per share Target’s "ook va#ue per common share
-remium paid
;-urchase price per share $ Target’s share price pre$merger< Target’s share price pre$merger
Re#ative *a#uation +arket +u#tip#e 4pproach
+u#tip#es of rep#acement cost paid
;4ggregate purchase price of equity N +arket va#ue of de"t assumed< Rep#acement cost of target’s assets
What has happened
Three$%tep -rocess
L&T hive$o! Cement "usiness into a separate company O H#tra Tech CemCo O 'here it 'i## ho#d =? stakeP "a#ance A? he#d "y the L&T shareho#ders proportionate#y
Grasim 'ou#d "uy A/:? in H#tra Tech CemCo from L&T at Rs 767/D per share and make an open o!er for another D?
L&T .mp#oyee We#fare ,oundation 'i## acquire Grasim’s 7:/D? stake in the residua# engineering company
)emerger ratio
,or every = shares ;of face va#ue of Rs 7< he#d in L&T the shareho#ders 'ere given 7 share ;face va#ue Rs =< in the ne' L&T
,or every : shares he#d in L&T the shareho#ders 'ere given = shares in the demerged cement company O H#tra Tech CemCo
Sale - !s 120 Grasim 14.86% Samrudhi 0.87% Others 84.27%
Shareholders of L&T
Shares 2*5
!estru"turi() 1*2 e#mer)ed om,a(
L&T Limited
L&T Trust 15.7% Others 84.27%
F of !s 2 ea"h #$ F of !s 10 ea"h
ssets & Lia/ilities +re#o,e( offer Grasim 12.6% L&T 20% Others 67.4%
ltra Te"h emo Ltd
2 euit shares of !s 10 ea"h for e3er 5 shares of !s 10 ea"h i( L&T
+ost o,e( offer Grasim 51.1% L&T 11.5% Others '7.4%
O,e( Offer
Buer
Seller
%
Cost
Grasim
L&T
A/:
DE= cr
Grasim
2thers
D
7=6A cr
Total
'"! $
@et 2utMo' % share
Cost Per Total Share (Rs/Cr)
-urchase of L&T from Re#iance Ind -urchase of L&T from 2pen +arket -urchase of CemCo from L&T 2pen 2!er for CemC2 %a#e of shares in e0isting L&T
*et +ut,o-
7/:
D6
66E
:/E:
7E6
=D9
A/:
767
DE=
D
767
7=6A
7:/6
7=
;9EA<
.'.
