The Ambanis-controlled company, which is the largest private shareholder in L&T with a 9.9 per cent stake, is planning to make an open offer for another 20 per cent of the company's Rs 248.52 crore equity shortly.

The Reliance Industries board, which will meet on January 20 to consider the third quarterly results, may deliberate on the details of the open offer for L&T. A Reliance spokesperson, when contacted, declined to comment on the development.

The L&T stock has witnessed tremendous activity during the last few days with around six per cent of the company's equity (1.6 crore shares) changing hands on January 14, the day the company announced the roadmap to transform itself into a premium engineering conglomerate with added thrust on cement, information technology andcommunications.

Market sources say that the hectic buying in the L&T counter was led by Reliance and/or its associates. The Sebi takeover code will be triggered when the group's holdings in L&T exceed 15 per cent.

As per Sebi guidelines, after the threshold of 15 per cent is reached, the buyer has to make an open offer to general shareholders within four working days of the purchase. The offer price is required to be the higher of the highest price paid by the acquirer or the average of weekly high and low of the closing prices quoted on the stock exchange where the share was mostly traded during the 26 weeks preceding the date of public announcement. The average price of the L&T stock on the National Stock Exchange during the last 26-week period works out to Rs 405.

Even at Friday's closing price of L&T on the BSE (Rs 463), the cost of acquiring an additional 20 per cent stake in the company works out Rs 2,301 crore.

Reliance has the cash to bankroll an open offer for L&T as and when required. As onMarch 31, 1999, RIL had cash balances to the tune of Rs 4,897.6 crore. It is in a position to retire its entire debt portfolio within less than two years. RIL's debt-equity ratio is pegged at 0.98 while the net debt to equity ratio is 0.52.

Financial institutions are the largest shareholders in L&T with a 32 per cent collective stake, followed by GDR holders (11.47 per cent), foreign institutional investors (11.43 per cent), domestic companies (8.5 per cent) and mutual funds (1.43) per cent). The public holding in the company is pegged at 25.27 per cent.

The L&T stock, which closed at Rs 434 on the Bombay Stock Exchange on December 22, 1999, zoomed to Rs 624 on January 4 before coming down to Rs 464 on January 14. The RIL stock price went up from Rs 223.75 on December 27 to Rs 315.90 on January 14. The RIL market cap is pegged around Rs 27,500 crore while the L&T market cap is Rs 11,500 crore.

RIL's move to take over L&T is in conformity with the company's corporate strategy of growth throughacquisitions. RIL managing director Anil Ambani had made it clear during the announcement of the company's half-yearly results a few months back that the company would look at various avenues for the deployment of its huge cash flows, including "acquisition opportunities" and debt reduction.

It is understood that L&T's avowed strategy of identifying cement and infotech as thrust areas has not gone down well with its largest private stakeholder, which is represented on the board by Mukesh Ambani and Anil Ambani.

Analysts say that RIL's strategic investment in L&T was made at a time when the latter was a focussed engineering company. However, L&T soon decided to spread its tentacles to new areas and invested more in cement. L&T's cement investments add up to around Rs 3,500 crore currently, and it plans to invest another Rs 1,000 crore to add 6.3 million tonnes of new capacity by fiscal 2003. The existing capacity of L&T -- the largest cement producer in the country -- is 12.8 million tonnes.

The Ambanis,say analysts, strongly felt that L&T should exit its cement business and stay focussed on EPC, which contributed 60 per cent of the company's Rs 7,292 crore turnover in 1998-99.

However, the company's professional management -- armed with the recommendations of Boston Consulting Group -- has decided to retain cement as a thrust area.

INSIGHT :
Proposal makes sense

A takeover by RIL makes immense sense because L&T is one of the premier engineering, construction and contracts companies, on the one hand, and RIL has an excellent track record of putting up projects in time. The fit between the two is clear, although the move would have made more sense earlier, when RIL was in the midst of putting up its projects.

So far as the stock is concerned, the prevailing market price has no relevance for the bid price as the market will discount the RIL offer, resulting in the L&T stock hitting the upper circuit at least for a few days. To acquire an additional 25.4 per cent of L&T (openoffer of a minimum 20 percent plus 5.4 per cent to hike the stake to 15 per cent) at Rs 600 per share, RIL will need Rs 3,787.45 crore. The deposits with Union Bank of Switzerland and Credit Suisse, as on March 31, 1999, alone amounted to Rs 4,855.16 crore. One side-effect of a RIL takeover would be the scuttling of L&T's own restructuring plans.

-- Urmik Chhaya