Post on 07-Apr-2018
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L&T: Restructuring theCement Business
8/4/2019 L&T Demerger
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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?
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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?
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Return
Growth
Capital
Risk
Cash Flow
Cost of Capital
Company Value
Determinants of Value
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Matching with First Principles
Reduce Risk
Enhance life of assetswith potential
Enhance growth of assets with potential
Restructuring
enhance valuethrough
strategies that...
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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
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De-merger
Placing Value in the
Shareholders’ Hands
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De-merger Concept
Shareholders
Company AB
Business A Business B
De-merge
Business B
Company B
Shares
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Post De-merger
Shareholders
Business A
Company AB
Company B
Shares
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De-merger - The Aptech Case
Immediate results Market Capitalization in Rs. crores
165.6 TOTAL
71.1
94.5
Aptech
Apple(Finance) 124.4Apple
8/4/2019 L&T Demerger
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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
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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%
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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)
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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
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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
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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
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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
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Valuation Methodologies
Relative valuation using Market Multiple Approach
Discounted Cash Flow (DCF) Methodology
Real Options
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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
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Relative ValuationMarket Multiple Approach
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
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Relative ValuationMarket Multiple Approach
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
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Relative ValuationMarket Multiple Approach
Multiples of replacement cost paid
= (Aggregate purchase price of equity +Market value of debt assumed) / Replacementcost of target’s assets
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What has happened ?
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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
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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
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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
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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
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