The L&T prize: the environment is different

The sell-off by Reliance of its stake in L&T does not have the same emotional overtones as their original acquisition did. But the first transaction and the controversy surrounding it were a reflection of the environment of more than a decade ago.

By C. R. L. Narasimhan

On Sunday last (November 18), Grasim Industries of the AV Birla Group announced its acquisition of a little over 10 per cent stake of Larsen & Toubro (L&T) from Reliance Industries for a consideration of Rs. 766.50 crores. The suddenness of the announcement certainly made it newsworthy but there were other weightier issues behind that bland announcement. L&T, a much admired engineering company, is ``professionally managed,'' in the sense that there are no promoter groups running it. The financial institutions have been its major stakeholders, now holding around 24 per cent of its equity. So, whenever a sizable chunk of its non-institutional share holding changes hands, it is bound to create extraordinary interest. More so because of the profiles of the vendor and the buyer.

Reliance Industries and the AV Birla group, among the best known Indian business groups, have not shied away from the opportunities presented by the new business environment. Compared to just a decade ago, a company can expand through acquisitions or reduce in size by hiving off a division using the stock market route. Today, there are far greater opportunities for mergers and acquisitions, whether through friendly negotiations or hostile bids. A takeover code is in place. Share buybacks are now in the statute books. Reliance Industries has been one of the most prominent users of the buy-back route. The Aditya Birla group paid a hefty sum for buying certain well known brands of ready made garments from Madura Coates. Numerous other examples involving either of these groups or other companies can be cited. There can be no doubt at all that the Indian corporate scene has started resembling its counterpart in the West.

Different scenario, different yardsticks

The last point is relevant because when Reliance acquired not only the stake but tried to wrest control of L&T 12 years ago, the environment was vastly different. (Some would say that Reliance itself was a vastly different entity at that time). Political battles were fought and ultimately the Ambanis had to give up on their attempt to control L&T.

The raging controversy of 1988 and the years following involved the role played by BOB Fiscal Services, a merchant banking subsidiary of the public sector Bank of Baroda. It allegedly acted as a conduit for the bulk transfer of L&T shares owned by the Life Insurance Corporation of India and the Unit Trust of India to be transferred to Reliance. BOB Fiscal was eventually ordered to be shut down. A decade and more after Reliance acquired those shares in a blaze of controversy has seen the maturing of the market.

For instance, no one is saying that the most recent transfer of the L&T shares is unethical. The business environment of today seems capable of accommodating the news of such large acquisitions/divestments without getting worked up. Certainly the sell-off by Reliance today has not had the same emotional overtones as its original purchase did. The control over L&T by another Indian business group - a possibility not ruled out for the foreseeable future by the Grasim spokesman - has not led to any feverish lobbying by politicians and other groups to block the sale. Reliance did not have a say in the day-to-day management of L&T even though all these years they held on to their stake.

The fact that the current interest on the transaction is centred on technical issues is further proof of the transformation of the market sentiment. Today, the short-term focus has been on the price paid. At Rs. 306.60 per share, it represents a 47 per cent premium over the last traded price of L&T. Other related issues here are the control of L&T over the long term.

While with a 10 per cent stake, Grasim gets into the driver's seat, will it step up its investments in L&T over the next few years and take it around but just below the 15 per cent mark? The numbers become important because under the Securities and Exchange Board of India (SEBI) rules an acquirer has to make an open offer it its stake goes beyond 15 per cent. In that connection the analogy of Gujerat Ambuja's acquisition of a 14.4 per cent stake in ACC has been cited. With the SEBI ruling that the acquirer need not make an open offer, the two companies are in a strategic alliance. ACC, like L&T, has a widely dispersed shareholding. With a large block of shares Gujerat Ambuja can effectively influence ACC.

How about control?

Will Grasim follow the same route is of much topical interest, also because like in the earlier transaction, the Grasim deal also has plenty to do with the fortunes of the cement industry. L&T, best known for its engineering and construction strengths, has branched off into cement and information technology areas. In cement, it has a capacity of 16 million tonnes and recently has been thinking of getting out of it by demerging the cement division and finding a strategic partner/investor.

The names of some prominent international cement majors were doing the rounds. Naturally, there are question marks over the future course of the demerger. After all, L&T now has a large investor with substantial interests in cement already. If the strategic alliance between Grasim and L&T holds, the former will have access to nearly 27 million tonnes of cement. The other side of the story, of course, is that the foreign cement majors have effectively been pipped at the post as it were. They will be unable to get a significant foothold in the domestic cement industry through future cement acquisitions.

Nearly all the interest on the transaction has to do with cement at this stage. It seems likely that Grasim paid a premium mainly because of cement. How Grasim uses its newly acquired strengths, the corporate restructuring it will adopt for its existing business will be keenly watched. There has not been much speculation as to what the financial institutions will do or how the transfer of a chunk of equity in L&T will affect their fortunes.

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