Corporate Front: M&A [Can India Cements Take Sri Vishnu Too?]

Even if B.V. Raju returns the equity stake Raasi Cements sold off, he will control Sri Vishnu Cement.

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He is nearly three-quarters of a century old, but the reactions of B.V. Raju, the CEO of the Rs 159-crore Sri Vishnu Cement, bely his age. After losing the Rs 488-crore Raasi Cements (Raasi) to the Rs 927-crore The India Cements 4 months ago, the Hyderabad-based industrialist has, finally, won the battle in his war with his adversary, N. Srinivasan, the CEO of India Cements.

Late in the evening of September 4, 1998, the Securities & Exchange Board of India (SEBI) allowed Raju to go ahead with his open offer to pick up a 20 per cent stake in Sri Vishnu Cement, which is also being eyed by a cash-strapped Srinivasan. That was a setback for the latter, who, through Raasi, held a 39.49 per cent stake in Sri Vishnu Cement. But Raju transferred that stake to 9 investment companies-allegedly owned by him-shortly before the takeover. With the SEBI having ordered an investigation into the legality of this share transfer-and the Hyderabad City Civil Court sitting in judgement on how fair the transfer is to the shareholder-Srinivasan is hoping that the deal will be reversed.

Meanwhile, Raju is not taking anything for granted. By acquiring the 26.21 per cent stake held by 3 financial institutions-Industrial Credit & Investment Corporation of India (6.53 per cent), Industrial Finance Corporation of India (6.52 per cent), and Industrial Development Bank of India (13.16 per cent)-in Sri Vishnu Cement, he has effectively increased his holdings in the company to 69.91 per cent.

Betting on the success of his open offer-the original offer-price of Rs 25 per share has been quadrupled to Rs 100-Raju is now trying to raise his stake in Sri Vishnu Cement to over 90 per cent. If all goes well, Raju could then delist the company by making another open offer to the remaining shareholders. Reassuringly for Raju, even if he has to return the 39.49 per cent stake to Raasi, the promoter of Sri Vishnu Cement would still hold a controlling stake of over 50 per cent.

That begs the question: did Raasi get shortchanged in the share-transfer deal? Its petition to the Hyderabad Civil Court states that ''the consideration (of Rs 10 per share) agreed to be paid for the sale and transfer of (Sri Vishnu Cement's) shares is totally inadequate... as it had no relation to the actual value of the shares.'' Argues a senior manager at India Cements: ''The fact that Raju is now paying Rs 100 for each share of Sri Vishnu Cement proves beyond doubt that the earlier transaction was grossly underpriced.''

However, Raju maintains that the price was finalised after an independent valuation, and it cannot be reversed since the Raasi board had cleared it twice, on September 20, 1997, and December 17, 1997. On another front, Raju has answered the sebi showcause notice, asking him to explain why no open offer was made to the shareholders of Sri Vishnu Cement at the time, by claiming that the 9 investment companies do not belong to him or any of his relatives.

The evidence suggests otherwise. Raju is the first shareholder in at least 2 companies: Sita Holdings, and Kumudhum Equity Holdings (paid-up capital of both: Rs 11,000). And the other investment companies have common directors, who were either Raju's employees or relatives. For instance, N. Pattabhiraman, Raasi's former Company Secretary, is a director on the board of not just Sita Holdings and Kumudhum Equity Holdings, but also Rampriya Consultants (paid-up capital: Rs 2,000), Bhoopathy Engineering Consultancy (Rs 2,000), and Sri Rampriya Developers (Rs 6.90 lakh). And Raju's wife, Padma Raju, is a director of Sphinx Estates (Rs 2,000).

Moreover, there is no dearth of coincidences: 8 of the 9 companies bought exactly 11 lakh shares each. All the 9 companies chose to sign the sale agreement in Isnapur, not Hyderabad, apparently to avoid filing the details with the Hyderabad Stock Exchange. And, finally, all the 9 bought stamp-paper from the same vendor in Hyderabad.

N Srinivasan, CEO, Indian Cements and Raasi Cements

Apart from questioning the share transfer, Raasi's new management has also revealed uncomfortable qualifications by the company's auditors about the way Raju managed the company. Raasi's annual report for 1997-98 states that Raju diverted Rs 30 crore to companies controlled by him. That sum included an advance of Rs 8.18 crore to employees, of which only Rs 4.61 crore is accounted for, and dues of Rs 5.85 crore from companies where Raju and his son-in-law, N.K.P. Raju, were directors. These allegations only buttress Srinivasan's contention that Raju betrayed the fiduciary trust reposed in him by Raasi's shareholders.

If the SEBI is convinced that the share-transfer was prejudicial to the interests of Raasi's shareholders, it has 2 options. One, the transfer could be reversed: Raju could be legally forced to return the 39.49 per cent stake to Raasi. Or, the SEBI could direct Raju to pay the difference of Rs 90 per share to Raasi. The latter would be an expensive slap of Rs 84.32 crore on his wrist. And would be welcomed by a cash-strapped Srinivasan, who is trying to extract a higher price for Raasi's erstwhile stake in Sri Vishnu Cement.

To achieve this objective, Srinivasan will have to launch a fresh raid on Sri Vishnu Cement. There's a problem: according to the Takeover Code, Raasi-or India Cements-should have announced its counter-offer in response to Raju's open offer on August 5, 1998, within 20 days. Or, by August 25, 1998. As this has not happened, Srinivasan is exploring how he can make his offer by triggering off the 10 per cent-provision of the Takeover Code.

BT learns that Srinivasan has already purchased a 1.50 per cent stake from the stockmarket, and is negotiating with foreign institutional investors, who hold 2.37 per cent of Sri Vishnu Cement's equity. Since Raju's offer closes on October 22, 1998, Srinivasan could delay his open offer till October 15, 1998, since most shareholders respond only during the last week. Of course, as Srinivasan's offer-price will be higher than Raju's, this could trigger off a bidding competition between the arch-enemies.

Here, Raju has an advantage. Unlike the past, when he was forced to give up control of Raasi due to the paucity of cash, the promoter's war-chest is full thanks to the Rs 150 crore India Cements paid him. That explains why he did not shy away from doubling the price-from Rs 55 per share to Rs 100-paid to the 3 financial institutions, who rejected Srinivasan's bid of Rs 75 per share. At Rs 100 per share, Raju's acquisition price for a 46.21 per cent stake in Sri Vishnu Cement-26.21 per cent from the financial institutions, and 20 per cent from the open offer-will be Rs 110 crore.

In comparison, India Cements' financials have been stretched taut by the acquisition of Raasi: it has paid Rs 400-odd crore to purchase a 92 per cent stake in the company. Given the tough times the cement industry is going through, coming up with another Rs 90 crore-assuming an offer price of Rs 125 per share for a 30 per cent stake-could be difficult, if not virtually impossible, for Srinivasan. Still, this M&A battle may not have cemented its share of surprises-yet.