A win-win situation for Ambanis, Birlas

Our Corporate Bureau

New Delhi, Nov 19: At first sight, it could well be seen as a master stroke by two close family friends rather than two of the biggest corporate houses: the Ambanis of Reliance Industries and Kumar Mangalam Birla of the AV Birla group. The sale deal of Reliance Industries’ 10 per cent stake in engineering, construction and cement major Larsen & Toubro to Grasim Industries, in the short term, may actually have been an exercise in convenience for the business families that have traditionally been close.

For Reliance Industries, a stake and a possible eventual management control of L&T had made strategic sense years back, when it initially started the process of buying into L&T. At that time, Reliance did not have the depth of full-fledged engineering expertise and L&T was seen as the ideal choice to provide that synergy of activities and expertise. But with the implementation of the Jamnagar refinery project, Reliance built up its own exeprtise which could even compete with that of L&T in terms of assets and manpower stren-gth. In fact, a few years back, Relia-nce even floated a company styled Reliance Projects which engaged in activities similar to that of L&T. Second, in the last decade, one of the major plans of Reliance was to get into the infrastructure sector in a big way particularly in the road-building and the power sectors. But in recent years, with infrastructure projects taking a back seat and Reliance itself having revisited its plans in this area, L&T stopped making sense, as it did some time back. Finally, analysts argue that Reliance may have also been frustrated by its inability to influence the process of demerger of the cement business of L&T at the pace it wanted. Given this backdrop, it possibly felt that if it could raise a good premium on its investments, it was possibly a good time to exit the company. The AV Birla group is hoping that this deal will help it leverage itself with the two major businesses of L&T.

With a stake in the company and board representation, industry experts opine that it will seek to influence and benefit from L&T’s cement and information technology businesses. Crucially, these are also two of the activities that have been identified along with rayon and non-ferrous metals as the major core areas of the AV Birla group in the future. At the same time, it will also seek to reduce its presence in other areas like petrochem with the planned exit in Mangalore Refineries.

What is the way forward for Grasim? For starters, it is hoped that that there will be at least two or three of its representatives on the board of L&T. While the deal watchers aver that Grasim Industries executive director, Saurabh Mishra is a hot favourite to join the L&T board, another potential candidate could be senior AV Birla group executive, Debu Bhattachrya. Through this, Birlas hope that it will move way from one of the strategies that Reliance had taken in the past with regard to board reopresentation in L&T.