KumarMangalam Birla, the chairman of the Aditya Birla Group, could not have hoped for a better birthday gift. Shortly after his 47th birthday in mid-June, the stage has been set for the entry of Grasim, the flagship company of the group to join the to join the league of the top 10 cement producers in the world.
The overwhelming response to the open offer made for acquiring 17Mt of Larsen & Toubro’s cement division, demerged into a new entity, Ultra Tech CemCo Ltd will allow this company to have a management control of a total capacity of 30Mt. This will catapault the company in the No 1 position in India which has cement producing capacity of 145Mt.
The open offer for acquiring 30 per cent of the stake in Ultra CemCo, closed on June 22, 2004. Made at an price of 342.60 per share the offer in the yet to be listed company, evoked a very good response from the retail shareholders as well as the institutional shareholders. The AVBirla group company already holds 12.6 per cent stake in the company and is committed to buying an additional 8.5 per cent stake from L & T in a complicated scheme of takeover of this cement division at the same price. The total outgoing for acquiring the 30 per cent additional stake amounting to Rs.12.79bn has been deposited in an escrow account.
Kumarmanglam, who was the receipent of the best businessman of the year award bestowed by India’s premier business magazine, Business India, can rightfully claim the acquisition as another feather in his cap and another turning point in the history of the group. The group which made a foray into cement less than two decades ago, consolidated its position by merging the cement division of its group company Indian Rayon in 1998 a year after it tookover a small but strategically placed cement company Digvijay Cement in Gujarat state in Western India.
The journey for the acquisition of L & T’s cement division started three years ago. It initially acquired a 10.05 per cent equity holding - 25 million shares - from Reliance in November, 18 2001 by paying Rs306.60 per share involving an outgo of Rs7665 million. Another 4.48 per cent shares were acquired by Grasim’s subsidiary from the open market at an average price of Rs176.75 per share at a total consideration of Rs 1966 million. Grasim made an open offer to acquire further 20 per cent at Rs.190 per equity share.The initial offers made (for acquiring the composite engineering, construction and cement giant L & T ) thereafter drew a blank as share prices on the bourses were above the offer price. Less than two per cent of the shares were tendered. Subsequent to the offer the company raised its holding to 15.35 per cent by purchasing 0.82 per cent shares at an average price of Rs.182.50 per share.
Through a lot of back door negotiations which involved convincing the financial institutions about unlocking the value in L &T, a proposal for a vertical split was approved to facilitate Grasim’s takeover of cement division and leaving the Engineering and construction company alone. The offer involved demerging the cement division into a new company in which Larsen & Toubro will hold 20 per cent equity and all existing shareholders of Larsen will get new shares in Cemco in the ratio of 4 new shares for every 10 shares held. Grasim on the basis of its estimated holding of 17 per cent also got 12.6 per cent in the cement company. The deal envisaged Grasim to acquire a further 8.5 per cent of the equity from Larsen at the same price as in the open offer. The total cost for acquiring the 17Mt, including the amount paid to Reliance for the original acquisition of 10 per cent stake, works out to approximately Rs22 bn (US$480m). More than the addition of the capacities the company will also get to use the respected brand of Larsen for a period of one year. The strategic location of cement plants of L & T will also help the group to become a national player besides giving it access to the western coast as Narmada Cement, a company acquired by L & T based near Surat is based on the coastline itself.