Mumbai: The Grasim Industries-Larsen and Toubro (L&T) saga has finally come to a happy ending.

The story began about three years back when L&T was considering getting out of its cement division if it got a right price for it. The well-known transnational cement company Lafarge showed interest but the price being offered, about $65 per tonne of cement capacity, did not match L&T's expectations.

A little while later, Grasim, another major player in the cement industry, bought over the equity stake of about 11 per cent, which the Ambanis held in L&T. The shares were bought at Rs 306 per share. It was clear at that time that Grasim wanted to consolidate its share of the cement business.

Grasim's next move was to increase its stake in L&T. This it did partly by buying L&T shares in the market and by making an open offer to the existing shareholders of L&T for buying the shares at Rs 190 per share. The offer did not find a good response.

L&T's plans for exiting the cement business, which was in the backburner, was revived with Grasim and CDC Capital partners evincing interest. After several proposals and protracted negotiations, the L& T cement demerger plan was finally agreed to between Grasim and L&T.

The essence of the deal is that L&T will demerge its cement division into a new company called CemCo. Grasim will, through a three-step process, acquire a 51-per cent stake in CemCo and shed its entire stake in L&T.

L&T will hold a 20-per cent stake in the new company and Grasim and other shareholders will hold the balance 80 per cent in proportion to their existing shareholding in L&T. This will result in Grasim holding 12.6 per cent in the cement company.

Grasim will then acquire 8.5-per cent CemCo stake from L&T at Rs 171.30 per share. Grasim will also make an open offer for buying an additional 30 per cent of the CemCo stake by making an open offer to the other shareholders at the same price.

For the existing L&T shareholders, who did not show much interest in the earlier offer, this one will be tempting. After all, he sells his new share at Rs 171.30 and at the same time gets to retain his original L&T share.

Grasim will also sell its existing 15.7-per cent stake in L&T to L&T's employees' trusts or foundations. This will result in Grasim exiting from L&T altogether. The trusts and foundations have to pay Grasim Rs 470 crore, for which L&T officials are looking at ways to raise the funds. Bank finance could be one possible route.

The Rs 2,200-crore deal is one of the largest in Indian corporate history and it will pitchfork Grasim to become the No 1 cement-maker in the country. Grasim's cement capacity will go up from about 14 million tonnes to about 30 million tonnes, which is approximately one-fourth of the country's cement capacity.

Grasim has a strong presence in western India and in the south. The increase in capacity will bring in tremendous advantages to Grasim in terms of packaging and transportation costs. "It is a win-win deal for both the companies," says L&T chairman A M Naik.

Grasim chairman Kumar Mangalam Birla concurs Naik's feeling. And why shouldn't he? While Grasim will emerge as the top cement-maker with better synergies, L&T also should be eminently satisfied with the deal. L&T has got its pound of flesh as far as the valuation of the company is concerned. More importantly, L&T can now focus its attention on engineering, which its real strength.

Talking to domain-b, A V Sreenivasan, secretary general, Cement Manufacturing Association, says the deal augurs well for both the companies as well as for the cement industry. "This will see a consolidation in the industry and will also revive transnational players' interest in the Indian cement industry."

Sreenivasan says about three years earlier many transnational players were interested in entering the Indian cement industry through the acquisition route. "Things did not work out because the valuations that were offered were about $60-65 per tonne. The valuation, in this case, is about $80 per tonne, which is in keeping with international standards."

We have seen many mergers and acquisition deals sour up after some time. The latest such case, according to many experts, could be the internationally well-known merger of Hewlett Packard with Compaq. The prime reasons for such deals souring up are that the deals when structured do not result in better valuations for the merged or demerged entity.

In the Grasim case, a better valuation has resulted for both the companies as well as the L&T shareholders. All's well that ends well.