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r Takeover battle between Grasim and L&T lead to demerger.

r This battle had its roots from earlier 1980s takeover battle of L&T &
RIL. It may be sufficient to say that RIL could not manage to get support
from the government, public at large and financial institutions.

r The largest shareholders of L&T were financial institutions which

collectively held 40 percent stake in L&T. LIC and UTI held approx. 27
percent and the rest was held by other FIs. FIs backed L&T management
and RIL had to step back.
r wn November 18, 2001, RIL sold its stake of 10.05% to Grasim, an A.V.Birla
Group for Rs. 766.5 crores. Grasim paid Rs. 306.6 per share which was 46%
higher than its original market price. Thereafter an investment company
subsidiary to Grasim acquired another 4.48% stake which lead to 14.53%
stake of Grasim in L&T.

r wn wctober 13, 2002, Grasim made an open offer to acquire 20% stake in L&T
at Rs. 190 per share. This offer miserably failed after few legal allegations
against Grasim. It could only collect only 0.38% stake.

r In December 2002 L&T carved out its cement business into an subsidiary
company.

r With 15.73% stake in L&T, Grasim & L&T hammered out a deal to carry out a
structured de-merger of cement business of L&T in June 2003.
 DE-MERGER DEAL
r With effect from April 1, 2003, the cement business of L&T was vested in a
separate company (Ultratech Cement Limited). It was decided that post de-
merger, Grasim will acquire the control of the resultant cement company.
However, L&T managed to retain certain key assets like L&T brand, ready mix
cement (RMC) business, the gas power plant in Andhra Pradesh, and the entire
residential and office property of the cement division.

r As per the demerger deal, the stake of L&T would be 11.5%, while that of
Grasim would be 21%. Remaining was allotted to the shareholders of L&T for
every 5 of 2 shares of ultratech cement ltd. Grasim would then make an open
offer for 30 percent of the Ultratech equity at the same price and would take its
stake to 51 per cent.

r The open offer by Grasim was meant for not only taking control of Ultratech,
but to give a chance to FIs to bring down their stake, in the process making
hefty capital gains. In subsequent developments, Grasim bought L&T·s stake
actually at Rs. 342.60 per share and made an open offer at the same price.
Grasim, thus, had to shell out Rs. 362 crores to L&T and Rs. 1298 crores in the
open offer.
 GRASIM·S MwTIVE
r As on 31st March 2003, the total cement capacity in India was approx. 135 mn
tonnes. L&T had the largest capacity of 18mn tonnes, followed by ACC at 15 nm
tonnes, Grasim at 13 mn tonnes and Gujarat Ambuja at 12.5 mn tonnes. In
acquiring L&T·s cement business, Birlas had a simple motive of Î
!
!
 !  '("). After acquisition the combined capacity of Grasim and
Ultratech went up to 31 mn tonnes, making Grasim the largest producer in India
and the eighth largest in the world.

r L&T was also considered as a premium brand and used to fetch higher price.
Though this brand would not be available to Grasim in the long run, L&T allowed
Grasim to use it for more than a year post acquisition. Grasim managed to
transfer brand equity of ¶L&T cement· to ¶Ultratech cement·.

r While Grasim was strong in the Southern markets, L&T was strong in the rest of
India. L&T·s strong distribution network was very vital to Grasim to push its own
brands also.
 WHY L&T SURRENDERED
r The first and foremost reason was survival. At the time RIL tried to takeover
L&T, FIs had backed L&T management to control over L&T. Birlas had
succeeded in convincing FIs about the structured vertical de-merger and about
FIs selling their shares in the resultant cement company either directly or
through open offer. Also, now Birlas could up their stake in L&T through either
creeping acquisition or through another open offer. So in order to keep their
control over L&T, which by then was a ten thousand crore empire even sans
cement, L&T management had no choice but to agree to give away the cement
business.

r L&T management also used de-merger to strengthen L&T balance sheet.

r In de-merger, L&T·s paid up capital was reduced to 10 percent of what it was

prior to de-merger. The number of equity shares was reduced to half and face
value to one fifth. This resulted into EPS shooting up.