Corporate Front: M&A [WIll the FIs Act Wisely In The Sterlite Saga?]

Instead of adopting a wait-and watch policy, the institutions should strike a deal with one of the bidders.

In any takeover tussle, there is a time to think--and a time to act. Or so proves India Inc.'s first hostile takeover since the enactment of the New Takeover Code in 1994. When the Rs 832.49-crore India Cements purchased B.V. Raju's 32 per cent stake in the Rs 414.05-crore Raasi Cement (Raasi) on April 6, 1998, it showed that while the financial institutions may not have been the lynchpins in the game, they could hardly afford to wait and watch.

If the events of l'affaire Raasi are any indication, the financial institutions could turn sellers for fear of ending up as losers in the case of the other takeover drama: the Rs 1,051-crore Sterlite Industries' offer to purchase a 20 per cent stake in the Rs 1,155-crore Indian Aluminium (Indal). For, the institutional shareholders in Raasi--with their 12.50 per cent stake--were left out as India Cements' CEO, N. Srinivasan, negotiated a deal with Raju at an average price of Rs 286 per share for the equity held by the latter.

Examining the lessons to be learnt from the Raasi episode, BT projects what they could lead to if the same sequence of events were to be replicated in the Sterlite-Alcan battle for Indal.

the institutional impasse. Clearly, the financial institutions-- which own 36.70 per cent of Indal's Rs 71-crore equity base--have to act soon. After all, the Takeover Code is biased against block shareholders if the acquirer manages to grab more than 20 per cent from other investors. That's because Clause 21(6) of the Code specifies: "Where the number of shares offered for sale by the shareholders are more than the shares agreed to be acquired by the person making the offer, such person shall accept the offers received from the shareholders on a proportional basis, in consultation with the merchant banker, taking care to ensure that the basis of acceptance is decided in a fair and equitable manner and does not result in non-marketable lots."

In case Sterlite manages to woo the holders of the Global Depository Receipts, who own a 12.20 per cent stake; the foreign institutional investors, who, together with non-resident Indians and overseas corporate bodies, hold 4.60 per cent; and the minority shareholders with 9.10 per cent, it could end up with a 25.90 per cent stake. And if the institutions also bite the Sterlite bait, the total may go up to 62.60 per cent. But if Sterlite agrees to buy only a 20 per cent stake, the financial institutions would be able to sell only 11.70 per cent of their shares on a proportional basis.

It is this clause that explains why Raju negotiated a deal with India Cements at a price lower than the offer price of Rs 300 per share. For, India Cements--which required only a 29 per cent stake to increase its holding to more than 50 per cent--had already won over the Andhra Pradesh Industrial Development Corporation to sell its 2.23 per cent stake, and a Chennai-based brokerage firm, Valampuri & Co. (1.40 per cent). Given the fact that other shareholders--like V.P. Babaria, director, Raasi, with a 5 per cent stake--were also willing to offload their holdings, Raju might have been forced to settle for a sale on a proportional basis.

More important, had that bid succeeded, Raju would have had to sell his remaining stake at a huge loss. Raasi's scrip price--which rose from a mere Rs 125.50 per share on January 1, 1998, to Rs 187.60 on April 3, 1998--would have come down after a successful bid. Indeed, the scrip fell sharply to Rs 151 on April 9, 1998, three days after Raju decided to sell out. So, what should the institutions do? Suggests a Mumbai-based investment banker, who has been actively involved in the Sterlite-Alcan battle: "The institutions should be proactive, and negotiate a deal with one of the bidders (Sterlite or Alcan). To prevent a loss in case the bidders hike their offer price later, the institutions can insist on a clause in the contract that the buyer should make up the difference."

The Predator's Predicament: After mopping up 20 per cent from the open offer, Sterlite can become a strategic stakeholder in Indal. And if it has not negotiated a deal with the financial institutions, the latter may compel Sterlite to buy their stake. At that stage, Sterlite's CEO, Anil Agarwal, would face the problem of raising the money to buy an additional 36.70 per cent from the financial institutions. After all, the investment would be Rs 463.56 crore assuming a price of Rs 115 per share. Just as Srinivasan--who owns a 53.56 per cent stake after the deal with Raju--may need as much as Rs 465 crore as he plans to pick the remaining shares at Rs 300 per share.

Do Sterlite and India Cements have the requisite funds for acquiring such a large stake? BT learns that the Industrial Credit & Investment Corporation of India (ICICI, 1996-97 income: Rs 4,150 crore)-- which is Sterlite's largest term-lending institution--has approved the Indal takeover bid. In fact, the ICICI has approved the purchase of a 50 per cent stake in Indal and is, probably, willing to bankroll part of the acquisition cost. Similarly, Srinivasan--who is raising Rs 250 crore through a rights issue to partially fund the takeover--may agree to buy the financial institutions' stake, but will ask them to extend a soft loan for the purpose.

As long as the acquirer company has excellent cash-flows, the acquirer should not have a problem in repaying the debts. In the end, the predator has to merely decide whether there will be significant value addition if his bid succeeds. That's true in both cases: India Cements will merge Raasi with itself to gain substantial marketshare, and Sterlite wishes to become a force in the metals sector via the acquisition.

The Promoter's Plight: Based on Raju's experience, the Montreal-based $7.78-billion Alcan Aluminium--with a 34.60 per cent stake in Indal--may have to consider the possibility of losing control over the company. Or at least face the prospect of having Sterlite as a strategic partner. Although the Canadian major has applied to the Foreign Investment Promotion Board to hike its stake in Indal to 54.60 per cent--in lieu of the counter-offer for an additional 20 per cent--it may not be too keen to make fresh investments in Indal. In fact, Alcan's inability to back its bravado with funds may just lead to the second takeover bid in three months going the predator's way.

Will A merger Follow The Raasi Acquisition?

The end came quietly--and swiftly. On April 6, 1998, at 2:30 a.m., the 74-year-old promoter of Raasi Cement (Raasi), B.V. Raju, put his signature to the 18 agreements that gave control of Raasi to N. Srinivasan, the CEO of India Cements. With the approximately Rs 150-crore deal--the average transaction price is Rs 286 per share--the first hostile bid in the recent history of India Inc. came to fruition. And the M&A game found its first victor. With Raasi in its bag, India Cements will churn out 7 million tonnes of cement every year. And its marketshare in south India will go up from 13.13 to 21.92 per cent.

Srinivasan pushed the Raasi deal with unprecedented aggression since competition was knocking on his doors. Newer capacities are coming up in the hitherto low-volumes markets of South India. For instance, the Rs 5,453.72-crore Larsen & Toubro has begun dry runs of its 2-million tonnes per annum (tpa) plant at Tadpatri (Andhra Pradesh), and will set up a second identical unit by 2001. And the industry leader, the Rs 2,511.67-crore Associated Cement Companies is also setting up a new plant at Wadi (Karnataka).

However, the benefit of the acquisition can be realised only if Raasi is merged with India Cements. That explains why India Cements--which owns a 53.56 per cent stake in Raasi--now plans to mop up Raasi's entire equity. After increasing the stake to at least 80 per cent, Srinivasan will put forward the merger proposal to the shareholders. Since Srinivasan's open offer is still valid, it will allow him to increase his stake to 74.56 per cent.

But what forced Raju to sell out? Apparently, the biggest stumbling block was his inability to make a counter-offer due to paucity of funds. Even Raju's efforts to bankroll the defence, with help from fellow-industrialists in Andhra Pradesh like Anji Reddy of the Rs 252-crore Dr Reddy's Labs and K.S. Raju of the Rs 959.22-crore Nagarjuna Group, were bound to come a cropper. Admits R. Kunjithapatham, 65, vice-chairman, Raasi: "It (the sell-out) was a painful decision. But we had no money for a counter-offer."

Raju may have put up a more spirited fight had he not been 74 years old, and if he had a son--and not sons-in-law--running the show at Raasi. But by selling out to Srinivasan, he has ensured that the family will be able to retain, and build, his other cement companies, including the Rs 162.74-crore Sri Vishnu Cements. Probably, Raju will be able to cement a new entrepreneurial path for himself, and the third generation.