labels: grasim industries, larsen & toubro
What price open offer? news
Uday Chatterjee
20 October 2002

Grasim Industries proposes to acquire an additional 20 per cent stake in Larsen and Toubro Ltd (L&T) at Rs 190 per share, aggregating Rs 945 crore, through the open offer route shortly. This decision was announced by the company last week.

The open offer is slated to commence early December 2002 and close early January 2003. Currently, Grasim holds a 14.48-per cent stake in L&T. If the open offer goes through, Grasim's stake will rise to 34.48 per cent.

The cost of this open offer will be mainly met through internal accruals. The acquisition would be done by Grasim and its wholly-owned subsidiary, Samruddhi Swastik Trading and Investments, acting in concert, the company said in a press release.

The offer price of Rs 190 per share is higher than the average price of Rs 174.93 per share over the last 26 weeks and Rs 170.08 over the last two weeks on the National Stock Exchange, which has the highest trading volumes for L&T.

However, the share price of L&T ended on 17 October 2002 almost at Rs 190. Thus the offer is unlikely to elicit much interest from L&T shareholders, as the offer price is almost the same as the current market price.

''This price is not likely to attract investors, especially the financial institutions, which hold a major chunk of the equity of the company,'' says an analyst. Financial institutions are understood to be reluctant to participate in the offer though there is no official word from them yet. It is learnt that foreign institutional investors want more than Rs 300 per share.

Contention in the offing
The open offer price could emerge as a contentious issue in the run-up to the open offer, according to equity analysts. Having offered Rs 306 per share to buy out Reliance's stake in L&T, the open offer price at Rs 190 is perceived as a ''raw deal'' for the small investor. ''It would be interesting to see how the Securities and Exchange Board of India (Sebi) looks at this issue,'' say theanalysts.

Kirit Somaiya, president of the Investors' Grievance Forum, has requested Sebi to stall this open offer as Sebi is still investigating the earlier Grasim-Reliance deal where, the forum believes, the deal was against the interests of minority shareholders. One has to wait for any action on Sebi's part.

Fielding volleys
But Grasim group executive president and CFO D D Rathi says the two deals are not comparable. ''The timing, rationale and the logic are very different. There cannot be a comparison.'' According to one analyst, the price offered to Reliance was primarily to get a toehold in the company, and therefore should not be compared with the open offer price.

Grasim made its first ''strategic'' purchase in L&T in November 2001 when it bought Reliance Industries' 10-per cent stake at Rs 306 per share for Rs 766.50 crore. Last month, Grasim Industries further increased its holding in L&T to 14.15 per cent after it acquired 1.26 lakh shares. The recent stake increase was done through market purchases since 9 September 2002.

After these purchases, Grasim's shareholding in L&T was 351.84 lakh shares. For Grasim, the cost of acquisition has worked out to Rs 970 crore so far. ''The initiative reflects Grasim's commitment to its strategic investment in L&T to enhance long-term shareholder value in both companies,'' the company said through the release.

''We are at the threshold of a 15-per cent stake in L&T. Therefore, the open offer becomes mandatory. Besides, we wish to augment our stake and strengthen our position in L&T and in the process bring down the average cost of holding,'' says Rathi.

Ground beneath the feet
L&T's cement business was the factor that propelled Grasim towards this move, but Grasim indicated that it was interested in L&T's other businesses - engineering and construction. Ever since Grasim made its first investment in L&T, the market has been abuzz with rumours that Grasim may try to gain management control with the support of financial institutions, which hold a 36 per cent stake in the target company.

But if the open offer fails to interest L&T shareholders, Grasim would be left with the option to take whatever is available through the open offer and resort to creeping acquisitions to increase its stake in L&T. That will take a few years.

Now, the small investor can only wait and watch the moves of Sebi, the FIIs and Grasim and hope that the offer price is raised beyond Rs 190 per share

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What price open offer?