The Hindu Business Line : Larsen & Toubro: Give Grasim the go-by

SHAREHOLDERS of Larsen & Toubro can avoid the open offer made by Grasim Industries at Rs 190 per share. The price is extremely unattractive as Grasim has taken advantage of the letter of the law and the depressed stock price of L&T for much of 2002. There is no premium element for control in the price.

In a case such as L&T, capturing the premium element in a takeover situation may be difficult, as it does not have a clearly identifiable promoter group. If it had one, a hard bargain would have ensured a premium of anywhere between 50 per cent and 100 per cent in a takeover.

Going forward too, this is unlikely to happen. The financial institutions that are well-placed to drive a better-priced deal seem content to play a largely passive. This wittingly or unwittingly serves Grasim's interests. Grasim's open offer follows its acquisition of a 10 per cent stake from the Ambani group at Rs 306 per share. Through open market purchases, it has over 15 per cent.

Shareholders would now have to hold their shares on the expectation that a restructuring may unlock better value for them. Grasim's own fundamentals-based valuation places a price tag of Rs 292.5 per share on L&T; Rs 130 per share is attributed to the cement business, which Grasim covets, and the rest to the engineering and infrastructure-centric businesses of L&T.

The open offer is underpriced by 35 per cent even when compared to Grasim's valuation on L&T, leave alone any premium for control element. Grasim would like this open offer to fail. If not, there is no reason why it should not have revised its open offer price after making public its views on the value attached to L&T.

Grasim may now hope that its version of the demerger of the cement business will go through. This is a distinct possibility since the financial institutions may not be averse to such a course. Grasim would then make an open offer for the cement unit at Rs 130 per share. Its costs may be lower by 32 per cent. It would also not have to make an open offer for the non-cement business, as the offer now underway would ensure compliance with the takeover code.

The cement business going to the Grasim fold may not be a bad outcome for L&T shareholders from a long-term point of view. But the price has to be right. The price at which Grasim wants to take control is by no yardstick an appropriate one. If the demerger happens, Grasim would also be left with a stake of over 15 per cent in the non-cement businesses. It may be in the position of a strong seller. If and when it sells out, an open offer may be triggered at a better price. Put together with the likely open offer at Rs 130 per share for the cement business, shareholders may get a better deal by waiting out.

The risks of rejecting the open offer now lie in:

the stock price seeking lower levels due to uncertainties regarding the business structure;

other likely bidders for cement say the MNCs are taking their time;

and financial institutions siding with Grasim and allowing it control without the right price being forked out.

If Grasim does not get into driving seat soon, L&T may always be the first stop for potential MNC entrants. This factor coupled with restructuring- linked gains makes the case for rejecting the open offer strong. The open offer closes on June 5.

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