The Hindu Business Line : L&T-Grasim: Uncertainty continues

SHAREHOLDER activism can delay the restructuring of Larsen and Toubro's business and capital, and affect the valuation of its stock as well as that of Grasim. L&T shareholders have approved the proposals in the past week.

But the changes sought by minority shareholders in the restructuring plan were not accepted .

Value will be unlocked if the legal formalities are completed without any hurdles and the stocks of the new cement company (UltraTech Cement) and the restructured L&T — with the engineering, electronic and construction business — are listed.

If the minority shareholders, however, raise objections in the court to the proposed arrangement, the story may take a different twist.

Concerns over the following aspects can affect the stock valuation:

There is bound to be uncertainty on the terms of restructuring. There have been instances such as Sandvik Asia and Hindustan Ciba Geigy-Sandoz where the court has directed a modification of terms to make them minority-shareholder friendly.

The process would take a much longer period to be completed. This would only add to the uncertainty.

Not all investors who have picked up the stock to benefit from the restructuring may be willing to remain invested till the protracted process is completed.

These factors would also have a bearing on the Grasim stock. The deal is set to make Grasim the No. 1 in cement with a combined capacity of 32 million tonnes.

An open offer at Rs 342.6 per share of UtraTech Cement in 2004 is certain, and a merger with Grasim's cement business imminent.

Grasim's business plans may, however, be affected if the process gets legally embroiled. As a result, if the integration of L& T's cement business gets delayed, it would have a bearing on Grasim's plans to pursue growth through further acquisitions. Grasim is well-placed to adopt such a growth strategy, but is unlikely to pursue it till the big-ticket L&T business is brought into its fold.

The smooth completion of the legal process is, therefore, vital to the valuation of both the stocks.

Timing of open offer: Shareholders of UltraTech Cement may not benefit from the move to ensure that the Grasim open offer is completed only after the stock is listed.

If there is the possibility of buying the shares upon listing and participating in the open offer, the initial price trends would not only be out of kilter with fundamentals, but also misleading.

The profitability of L&T's cement business has not been adequate to cover interest charges. Barring a few quarters when cement prices ruled high, this business has a splash of red.

It will take Grasim at least two years to get the debt burden to a level that would improve profitability. The risks of an unfavourable swap ratio for the merger with Grasim would also be a negative factor in the pricing of the UltraTech stock.

In this backdrop, the valuation is likely to settle well below the price of Rs 342.6 once the open offer is completed. This prospect may, however, ensure that Grasim's picks up a 30 per cent stake through the open offer, ends up with a stake in excess of 51 per cent and gets undisputed control of UltraTech.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Quiz

Urea: As props fall only the robust will stand

Subsidies through sunset years

`Urea prices are unlikely to fall back to $90 levels'

Fertilise your portfolio

Mahindra Scorpio: Has a sting still

Question `n' Auto

How corporates fared in October-December: Mid-rung firms steal the show

A window for global diversification

Shareholding pattern: Control by definition

L&T-Grasim: Uncertainty continues