l&t demerger

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L&T: Restructuring theCement Business



L&T Restructuring the Cement Business

What factors motivated Grasim to acquireRIL’s stake in L&T at a hefty premium?

Was the open offer price of GrasimReasonable?

Will the proposed de-merger unlock theshareholder value of L&T?



L&T Restructuring the Cement Business

What are the options before L&TShareholders?

Will the proposed acquisition change theindustry dynamics?

How will you justify the role of variousstakeholders in the episode?



Return

Growth

Capital

Risk

Cash Flow

Cost of Capital

Company Value

Determinants of Value



Matching with First Principles

Reduce Risk

Enhance life of assetswith potential

Enhance growth of assets with potential

Restructuring

enhance valuethrough

strategies that...



The Value Creation Matrix

Value

Creation

Financial Dimension•Redeploy capital

•Increase ROI

Market Valuation

•Release Value

ManagerialDimension

•Improve management•Replace inefficient one

OperationalDimension

•Scale Economics

•Improve margins

Risk Dimension

•Cost of capital

•reduction



De-merger

Placing Value in the

Shareholders’ Hands



De-merger Concept

Shareholders

Company AB

Business A Business B

De-merge

Business B

Company B

Shares



Post De-merger

Shareholders

Business A

Company AB

Company B

Shares



De-merger - The Aptech Case

Immediate results Market Capitalization in Rs. crores

165.6 TOTAL

71.1

94.5

Aptech

Apple(Finance) 124.4Apple



L&T De-merger of Cement DivisionBackground

% share Cost

Per Share Total

(Rs/Cr)

Purchase of L&T from RIL (at 47%premium) on Nov.18, 2001 10.05 306.6 776

Purchase of L&T from Open

Market 5.65 166.5 234

15.7 1010



L&T: Restructuring the CementBusiness

October 14, 2002: Open offerfor 20% equity of L&T at Rs190 per share (at 10%premium)

Shareholding Pattern of L&Tat the end of September 2002

LIC (18.6% stake): offer pricelower than the intrinsic value

Banks/FIs/Insurance

26.53% Grasim 14.15%

MutualFunds /

UTI

11.98% IndianPublic

31.68%

FIIs 6.35% NRIs 0.75%

PrivateCorporateBodies

18.08% Others 4.63%



Response of L&T Management

Price was not beneficial to the shareholdersof L&T

Worried over losing control over thecompany

Approached FIs to oppose the open offer

L&T Valuation at close to Rs 300 a share

(Business Standard, November 15, 2002)



Kumar Mangalam Birla’s Response

“… The main objective of the offer is to bring down the Grasim Industries’ cost of acquisition of the cement and engineering

major. Shareholders of L&T have several options. The group’s open offer for Larsen & Toubro is not a mandatory offer, and hence L&T shareholders are free to decide whether they want to accept the offer price….” Take it or leave it, says Birla on L&T Offer. Business Standard,November 22, 2002



Indian Cement Industry

Largely fragmented with an installed capacity of 130MTPA as on March 31, 2002

120 cement plants & 54 companies

L&T: 16 MTPA Grasim Industries: 12.9 MTPA

Ambuja Group: 12.5 MTPA

ACC: 14.93 MTPA

High leverage, debt-to-equity ratio of 2.32:1



Possible Synergies:Grasim & L&T Combine

Considerable presence in the western & southernmarkets

Cluster that consume 42% of total cement

Grasim & L&T combine will be number 1

Operating costs reduction

L&T Plants have low costs per ton of cement

Better logistics and inventory management

Enhanced Financial Flexibility



CDC Capital Partners Plan

L&T Cement Division

70% stake with L&T

25% stake with L&T shareholders 5% stake with CDC Capital Partners

Valuation of Cement business

$75 per ton or Rs 156-158 per share



Valuation Methodologies

Relative valuation using Market Multiple Approach

Discounted Cash Flow (DCF) Methodology

Real Options



Relative ValuationMarket Multiple Approach

Multiples of earnings paid

= Purchase price per share / Target’s fullydiluted EPS before extra-ordinary items

Multiples of cash flow paid

= Purchase price per share / Target’s fullydiluted CFPS before extra-ordinary items




Multiples of EBIT paid

=(Aggregate purchase price of equity + Marketvalue of debt assumed) / Target’s EBIT beforeextra-ordinary items

Multiples of EBITDA paid

=(Aggregate purchase price of equity + Market

value of debt assumed) / Target’s EBITDA before extra-ordinary items




Multiple of book value paid

= Purchase price per share / Target’s book value per common share

Premium paid

= (Purchase price per share - Target’s shareprice pre-merger)/ Target’s share price pre-

merger




Multiples of replacement cost paid

= (Aggregate purchase price of equity +Market value of debt assumed) / Replacementcost of target’s assets



What has happened ?



Three-Step Process

L&T hive-off Cement business into a separate company – Ultra Tech CemCo – where it will hold 20% stake; balance80% held by the L&T shareholders proportionately

Grasim would buy 8.5% in Ultra Tech CemCo from L&T atRs 171.30 per share and make an open offer for another30%

L&T Employee Welfare Foundation will acquire Grasim’s15.3% stake in the residual engineering company



Demerger ratio

For every 2 shares (of face value of Rs 10) held in L&T,the shareholders were given 1 share (face value Rs 2) inthe new L&T

For every 5 shares held in L&T, the shareholders weregiven 2 shares in the demerged cement company – UltraTech CemCo

Sale @ Rs 120



Shareholders of L&TGrasim 14.86%Samrudhi 0.87%Others 84.27%

L&T Trust 15.7%Others 84.27%

L&T Limited FV of Rs 2 each -> FV of Rs 10 each

Ultra Tech CemCo Ltd Grasim 12.6%L&T 20%Others 67.4%

Grasim 51.1%L&T 11.5%Others 37.4%

Restructuring1 : 2

Pre-open offer Post open offer

Sale @ Rs 120

Buyer Seller % CostGrasim L&T 8.5 362 cr

Grasim Others 30 1278 cr

Total 38.5 1640

Assets & Liabilities

Shares2:5*

Open Offer*2 equity shares ofRs 10 each for every

5 shares of Rs 10each in L&T

De-mergedCompany



Net Outflow

%share Cost

PerShare

Total(Rs/Cr)

Purchase of L&T from Reliance Ind 10.05 307 776

Purchase of L&T from Open Market 5.65 167 234

Purchase of CemCo from L&T 8.5 171 362

Open Offer for CemCO 30 171 1,278

Sale of shares in existing L&T 15.7 120 (468)

Net Outflow 2,182

l&t demerger

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