Reliance on to a winner

But has Birla bought himself a lemon?

It is being dubbed a whopper of a deal that ends the controversial 15-year corporate saga of a failed hostile takeover. However, Grasim Industries’ acquisition of Reliance’s 10 per cent stake in Larsen & Toubro is also making waves because few deals have been so one-sided as this one. Reliance sold its 10 per cent stake to L&T at Rs 306.60 — a 47 per cent premium to the market price of Rs 208.50. However, the premium is well over 90 per cent if one considers that the price on November 2 was just Rs 164, and that the deal was preceded by huge speculation, brazen price ramping and absurdly high trading volumes, which zoomed from around 13 lakh shares to over one crore shares traded every day. The Securities and Exchange Board of India is now investigating the price manipulation and possible insider trading in the scrip. That Reliance was in the midst of negotiations to sell its stake was well known; initial rumours put Gujarat Ambuja and Lafarge in the fray, but now that Kumarmangalam Birla has pipped the competition to the post, is it worth the price?

From Reliance’s point of view, the deal is breathtaking. Look at the facts. Not only has Reliance bagged a substantial premium without even selling a controlling interest, but the sale puts Rs 767 crore of much-needed cash in its kitty; money which would come in handy if the company bids for any of the public sector undertakings that are being furiously sold by the government. Also, L&T is of no further use to Reliance. Not only has it built enormous project implementation and engineering capability within its own companies, but Reliance’s future growth will probably be through acquisitions, rather than large greenfield projects that used to be funded mainly through institutional finance and initial public offerings. The deal is far less comprehensible from the Birla end. Although it is obvious that L&T’s cement capacity was the main attraction, the company is different from ACC, where the exit of the Tatas gave effective control to Gujarat Ambuja even with a 14 per cent acquisition. Also, the high premium that they paid probably made sense because Ambuja managed to controversially avoid making an ‘open-offer’ to retail investors. In the Birla case too, the 10 per cent L&T stake does not involve making an open offer, however it is unlikely that effective control will happen easily or without a substantial additional cost to Grasim. The substantial drop in Grasim’s stock price on Monday also reflects the general perception in the market that Kumar Birla may just have bought himself a lemon.