Mumbai: The board of Larsen & Toubro (L&T) has decided to demerge its cement business into a separate cement company, called CemCo, in which L&T will retain 20 per cent of the equity. The balance will be distributed to its shareholders, in proportion to their shareholding in L&T.

The board of Grasim Industries also gave its approval to this transaction. As a consequence, on the demerger of L&T's cement business to CemCo, Grasim will acquire an 8.5-per cent equity stake from L&T and, thereafter, make an open offer at the same price, for 30 per cent of the equity of CemCo, to acquire the management control of CemCo.

CemCo will be listed on the National Stock Exchange and the Mumbai Stock Exchange, among others. Investors holding global depository ratios (GDRs) in L&T will be entitled to proportionate GDRs in CemCo as well. Concurrent to Grasim's purchase of an 8.5-per cent equity stake from L&T in CemCo, Grasim will divest its holding in L&T to one or more of L&T foundation or trusts.

The detailed scheme of arrangement will be developed, in compliance with regulations, over the next few weeks. This transaction will represent a major value enhancing initiative for both the parties.

For L&T's shareholders, the creation of two listed entities — the demerged L&T and CemCo — will create a long-term value, with a possible re-rating of the demerged L&T as a focused engineering and technology company, and the option of participating in the proposed open offer by Grasim for CemCo.

For Grasim, the transaction provides a controlling interest in an additional 16.5-million tonnes of cement capacity, the opportunity to create a synergy between the cement operations of Grasim and CemCo, and strengthen its ability to compete against multinational companies in the Indian market.

Grasim will buy shares from L&T in CemCo, and make an open offer for acquiring management control at Rs 171.30 per share, and sell its holding in the demerged L&T at Rs 120 per share. For the sake of simplicity, these prices are based on an assumed equity share capital of 24.87 crore fully paid-up equity shares of Rs 10 each for both the entities — the demerged L&T and CemCo.

The number of equity shares actually to be allotted in the two entities may vary and accordingly the offer price might change proportionately.