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Which company’s shareholders benefited the most from the L&T-Grasim deal? - Views on News from Equitymaster
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  • Jun 30, 2003

    Which company’s shareholders benefited the most from the L&T-Grasim deal?

    It has been one of the landmark deals for the Indian cement sector. Post the acquisition of L&T’s cement division by Grasim, the combined entity would account for 23% of total capacity. While we have analysed in detail the financial and growth implications for both the companies in detail, what investors’ think about this deal is also of significance. We also sum up our view on this deal in brief for a retail investor.

    (% gains) L&T Grasim
    Before announcement* 12.7% 10.5%
    After announcement** 4.1% 12.8%
    Since May 19th, 2003 16.9% 39.9%

    *one month, **till date

    What market says?
    There is not much to read between the lines from the poll. Of the total participants, majority (though by a small margin) feels that Grasim’s shareholders have benefited the most (42% of respondents). 33% voted for L&T as the key beneficiary of this deal. The view of our participants and the stock market seems to be the same. Consider the performance of both the companies on the bourses one month before the date of announcement of merger and after the demerger announcement.

    Since May 19th, 2003, while Grasim has gained 40%, L&T has moved up by 17%. However, if we were to break up the period – pre and post demerger announcement, it is a different picture altogether. While Grasim was up by 11%, L&T outperformed with a 13% gain till June 18th, 2003 starting May 19th 2003. But after the announcement, Grasim has outperformed L&T by a significant margin, which coincides with the view of our visitors i.e. Grasim has been the biggest beneficiary from the deal. Almost 25% of the participants feel that both L&T and Grasim shareholders have benefited.

    Our view…
    Consider the broader benefits for both the companies:

    In the last decade, L&T has done little to create shareholder wealth. The company’s performance towards the latter half of 1990s was mired by unrelated diversifications (L&T Trade for instance) and cash consuming cement division. EPC division, where L&T has an edge over competition, has been subsidizing (to an extent) for losses suffered on the cement division front. This demerger will bring back focus into the management and enable the company to create wealth for its shareholders in the long-term.

    Compared to Gujarat Ambuja that seems to be hesitant about increasing stake in ACC, Grasim has clear-cut strategies in place. Though there are apprehensions about sharing wealth with shareholders, Grasim is well placed to capitalize on the expected rise in cement demand. Though the company may have paid higher for the cement division of L&T, the leverage from the deal is of greater significance in the long-term. Just to put things in perspective, L&T’s cement division clocked a turnover of Rs 27 bn, which a PBIT margin of around 6%. This compared to Grasim’s cement division PBIT margin of 10% is very low. Given this backdrop, Grasim can unlock significant value from the acquisition and recover the cash invested at a faster rate.

    Keeping these factors in mind, Grasim seems to have been the bigger beneficiary from the deal.



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