The Hindu Business Line : Grasim/L&T: Needed, bold approach by institutions

INVESTMENT institutions such as the Life Insurance Corporation of India (LIC) have to step in and make sure that they, as well as other shareholders in Larsen & Toubro, get a good deal in a takeover situation. A stake of 37.5 per cent places this group of investors in a pivotal position. So far, they have been acting more like persons in concert in the bid made by Grasim.

If the institutions do not act fast now, the opportunity to get a better deal will slip away. The need for expedient action stems from a ruling by the Securities and Exchange Board of India (SEBI) that allows the Rs 190 per share offer to go through.

SEBI goes by letter... : The regulator has taken the position that the acquisition of shares by Grasim from Reliance at Rs 306 per share does not trigger an open offer on account of change in control. Grasim has been completely in tune with the letter of the law. This has helped it sail through fresh investigations by SEBI on the matter. However, the fact that the approach has not been in line with the spirit of the law cannot be missed.

Demands more disclosures: The only significant aspect to come out of the

SEBI's investigation is the additional disclosures made by Grasim. The details of its vertical merger plan for the cement business of L&T have now been made available in the open offer document, which places a value of Rs 292.5 per share on the company as a whole. The document also places a value of Rs 130 per share on the cement business of L&T.

The reasons for paying Rs 306 per share to the Reliance group have also been outlined. But these disclosures by themselves may not lead to better value for L&T shareholders. There is no evidence of Grasim wanting to raise its open offer price to Rs 292.5 per share placed on L&T. All that has been made clear is a willingness to make an open offer at Rs 130 per share for the cement company after the demerger.

Seize the moment: The least the institutions can do is to demand a revision, at least to the fundamental value placed by Grasim on L&T. The basis for such an action has been given by Grasim itself in justifying the price paid to Reliance. The time has also come for the institutional and other professional directors on L&T's board to come out with an opinion on the offer at Rs 190 per share. Such an announcement could put pressure on Grasim to bid up its offer price.

In the Raasi Cement case, the institutions insisted that India Cements buy their stake at Rs 300 per share, which was an extremely attractive price. To show such an activist approach in a relatively small deal, and an extremely passive one in the L&T case does not appear rational. The time has come for them to don, think and act the role of promoters. Any extraneous pressures must be resisted.

An unlikely prospect: But going by the events relating to the cement business of L&T over the last three months, any such active approach appears to be a distant prospect. The institutions also have to consider the live possibility that Grasim may be happy even if this open offer does not go through. That would open the way for pushing the demerger through, using the combined clout of the Birlas and the institutions, and then making an open offer for the cement business. Grasim's purpose would then be achieved at a low cost. This obviously will do no good to L&T shareholders. It may also affect the value of non-cement businesses significantly.

If the institutions feel that by ignoring the Rs 190 per share offer, they are sending out a message that L&T is worth more, they cannot be more mistaken. They would only end up bolstering Grasim's hold. If they miss the opportunity now, there would not be any chance to undo the damage. If they think L&T would gain in value in the Grasim fold, they need to explain why they think so. Even if they do so, that will still not address the low price on offer.

Go for value enhancement: The institutions need to support a strategy that would unlock and maximise value in L&T. The demerger, as originally proposed by L&T, still appears the way to go. It envisages a 25 per cent stake to L&T shareholders, a 37.5 per cent stake to L&T and 37.5 per cent to a strategic partner in the cement company.

The issue of when to do the demerger has to be addressed. If conditions are not good now — in terms of interest that may shown by potential MNC bidders — due to the latter's global level troubles, L&T can well afford to wait for the right time to make a move.

This proposal has been doing the rounds for three years now and there may be no harm in waiting for some more time.

When smaller players such as Kesoram and Century Textiles have put their selling plans on hold due to lacklustre interest, there is no reason why L&T, which is the largest player, cannot do so. The nominee directors of institutions must play an independent role in what is a professional board, than toe a line that may suit only Grasim.

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