1. Merger Acquisitions &
Corporate Restructuring
Group Assignment Submission
EPGP 2009-10 - Term V- Group IV Submission
15 April 2010
Instructor: Prof. Neeraj Dwivedi
Prof. D L Sunder
Submitted by:
Altaf Siddiqui
Pankaj Kumar
Rahul Dhandhania
Rajendra Inani
Vikram Duggal
Vaibhav Samant
Table of Contents
1 Was the original open offer price attractive to L&T
shareholders? Why (not)? ...................................... 2
1.1 Valuation of L&T – Before Demerger (using
adjusted PV method) .............................................. 2
1.2 Valuation of L&T – Before Demerger (Relative
Valuation)................................................................ 3
2 In what way would the proposed demerger of
cement division benefit L&T shareholders? ........... 3
2.1 Valuation of L&T – After Demerger ........................ 3
2.1.1Valuation of L&T (Cement Div) ............................... 3
2.1.2Valuation of L&T (New L&T) ................................... 4
2.1.3Analysis ................................................................... 5

2. 1 Was the original open offer price attractive to L&T shareholders? Why (not)?
The original offer price was not attractive to L&T Share holders. As shown in following calculations,
the value of shares comes out to be Rs 342 by the Adjusted PV method and Rs 394.27 by relative
valuation, against offer of Grasim of Rs 190. Also the calculation after the Demerger shows that the
valuation of the new companies proved better.
1.1 Valuation of L&T – Before Demerger (using adjusted PV method)
2006
2002 2003 2004 2005 onwards
EBIT(1-t) 5430.04 5147.45 5198.92 5250.91
Add: Dep 3358.00 3193.20 3245.00 3310.00
-
Less: Capex 0.00 0.00 2000.00 -1000.00
Change in W.C 0.00 0.00 3016.00 -1243.00
Free Cash Flow 8788.04 8340.65 7427.92 10803.91
Less : Interest 3752.40 2251.50 2030.00 1796.00
FCFF to equity 5035.64 6089.15 5397.92 9007.91
Terminal Value 80370.96
PV of FCFE 4805.84 7140.19 63706.68
Value of firm 75652.72
Add: Tax Shield 41153.21
Value of Firm 116805.93
Less : Value of
Debt 31760.00
Value of Equity 85045.93
Value of Share 342.10
2002 2003 2004 2005 2006
Tax Shield 10387.71 9528.00 8575.20 7717.68
Terminal value 33334.10
PV of Tax Shield 7736.75 6282.25 27134.21
Value of Tax Shield 41153.21
Growth rate 0.01 Cost of Equity 0.1232
Tax Rate 0.3 Cost of Debt 0.108373
Risk Free Rate 7% D/E of Gujrat Am 0.55
Market return 14% Unlevered Beta 0.46
Beta 0.76 Levered Beta 0.76
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3. 1.2 Valuation of L&T – Before Demerger (Relative Valuation)
Industry BV of LT Mkt Cap Value per Sales Market cap Mkt Cap of Tonnage Mkt cap of Value per
compar divisions share of of industry L & T by L&T cement share of
able cement relative by relative different
MV/BV div valuation valuation div
Engg. & 0.96 NA 69781.40 54679.40 48229.42 194.00
Construction
Electrical 2.53 NA 11723.80 12201.70 9003.64 36.21
Cement 1.97 14240.30 28073.82 112.93 NA 12.5 40795 164.05
Value of L&T share 394.27
2 In what way would the proposed demerger of cement division benefit L&T
shareholders?
2.1 Valuation of L&T – After Demerger
2.1.1 Valuation of L&T (Cement Div)
2006
2002 2003 2004 2005 onwards
EBIT(1-t) 1898.12 1244.74 1257.19 1269.76
Add: Dep 2153.30 2222.90 2331.00 2396.00
-
Less: Capex 0.00 0.00 1692.00 -709.00
-
Change in W.C 0.00 0.00 -436.00 1000.00
Free Cash Flow 4051.42 3467.64 5716.19 5374.76
Less : Interest 0.00 0.00 1512.00 1323.00
FCFF to equity 4051.42 3467.64 4204.19 4051.76
Terminal Value 41452.30
PV of FCFE 3754.74 3231.77 33063.23
Value of firm 40049.74
Add: Tax Shield 41169.64
Value of Firm 81219.39
Less : Value of
Debt 18923.00
Value of Equity 62296.39
Value of Share 250.59
2002 2003 2004 2005 2006
Tax Shield 5676.90 5376.90 5076.90
Terminal value 37128.19
PV of Tax Shield 4979.06 4353.41 31837.17
Value of Tax Shield 41169.64
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4. Growth rate 0.02
Tax Rate 0.3
Risk Free Rate 7%
Market return 14%
Beta 0.71
Cost of Equity 0.1197
Cost of Debt 0.079903
2.1.2 Valuation of L&T (New L&T)
2006
2002 2003 2004 2005 onwards
EBIT(1-t) 3338.30 3914.89 3954.04 3993.58
Add: Dep 0.00 0.00 914.00 914.00
Less: Capex 0.00 0.00 -308.00 -291.00
Change in W.C 0.00 0.00 3452.00 -243.00
Free Cash Flow 3338.30 3914.89 1724.04 5441.58
Less : Interest 0.00 0.00 518.00 473.00
FCFF to equity 3338.30 3914.89 1206.04 4968.58
Terminal Value 45745.35
PV of FCFE 1077.11 3963.04 36487.46
Value of firm 41527.61
Add: Tax Shield 24889.22
Value of Firm 66416.83
Less : Value of
Debt 12837.00
Value of Equity 53579.83
Value of Share 215.53
2002 2003 2004 2005 2006
Tax Shield 3851.10 3450.00 3150.00
Terminal value 20199.20
PV of Tax Shield 3316.18 2910.38 18662.65
Value of Tax Shield 24889.22
Growth rate 0.01
Tax Rate 0.3
Risk Free Rate 7%
Market return 14%
Beta 0.71
Cost of Equity 0.1197
Cost of Debt 0.040352
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5. 2.1.3 Analysis
Based on our calculations as shown above, we conclude that the demerger would be in favor of L&T
for the following reasons:
 The value of the company post demerger of the cement division totals to approximately INR
466.12 (250 for the cements division + 215 for the rest of the company). This is far greater than
the value of INR 342.10 which is value that we have arrived at for the company without the
demerger. This would imply that there is an immediate value creation for the share holders who
would now be getting a premium for their holdings in L&T without incurring any substantial risks
 The demerger would give an opportunity for L&T shareholders to either exit or to diversify. Many a
times demergers are done in order to give the share holders an option to stay with the company
of their choice so for example, if share holders of the L&T are invested in the company purely to
stay with the cement business and not the IT or other business, they can choose to sell of their
stake in the new L&T company and increase their stake in the demerged cement company that
has been spun off in the demerger. On the other hand, share holders looking to exit out of the
cement business and stay with the new diversified L&T can choose to liquidate their stake in the
cement entity and increase their holdings in the other company
 The demerger would lead to opportunities for growth as L&T cement had a strong presence in the
north. The demerger would list L&T cement as a separate entity which could be open to options of
mergers or acquisitions by stronger players and also increase overall share holder value.
Besides, the company could use its strong distribution network now exclusively for its cement
products instead of pushing other L&T products which might not have been possible if the entity
would have kept merged with the parent company.
 The de-merger also led to L&T’s paid up capital getting reduced to 10 percent of what it was prior
to de-merger. The number of equity shares was reduced to half and face value to one fifth. This
resulted into EPS shooting up. In addition, while L&T had to transfer reserves worth approx. Rs.
790 crore to UltraTech, and L&T also suffered loss of paid up capital of Rs. 225 crore, debts
amounting to Rs. 1900 to 2000 crore got transferred to UltraTech, due to the formula of splitting
common loans specified under section 2 (19AA) of the Income Tax Act, 1961 which is mandatory
if the de-merger has to be tax neutral. Due to this L&T’s Debt: Equity ratio sharply improved
 The demerger was to ensure survival for the company. At the time RIL tried to takeover L&T, FIs
had backed L&T management to control over L&T. However, this time around the situation was a
bit different. It is believed that while the open offer for L&T was going on, Birla’s had succeeded in
convincing FIs about the structured vertical de-merger and about FIs selling their shares in the
resultant cements company either directly or through open offer. It is also believed that, if L&T
management had continued to be adamant about not agreeing to vertical de-merger, FIs were
willing to sell their stake in L&T to Birla’s provided the price was ‘right’ which would let things go
out of control for the shareholders
 L&T was also considered as a premium brand and used to fetch higher price. Thus from a
shareholder perspective, in an economy which was just starting to come out of the woods and
stock markets were still bearish and valuations low, this was a good opportunity to encash on the
growth opportunities that the cement as well as the other units within L&T offered. A look one of
the Exhibits in the case tells us that the first post de-merger year, on the gross turnover of Rs.
2700 crore, UltraTech posted a PBT of just Rs. 49.20 crore. In fact, considering that other
businesses of L&T grew by 32 percent in 2003-04, engineering division turnover in 2002-03
would have been around Rs. 7500 crore and that of cement division around Rs. 2000-2100 crore.
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