Larsen & Toubro (L&T), an Indian manufacturer of engineering equipment, yesterday offloaded its 11.5% stake in UltraTech Cement for Rs10.4 billion ($218 million). Its divestment from the Indian cement producer was done through a placement to institutional investors and comes one year after it sold its concrete business to LaFarge.
The base size of the deal consisted of 10.3 million shares, but an upsize option was exercised that added another 4 million shares to the offering. The final size of the deal was therefore 14.3 million shares. This represented an 11.5% stake in the company, the entirety of L&T's stake.
The deal went out with an indicative price range of between Rs720 and Rs735, which translated into a discount of between 3.6% and 5.6% to Wednesday's closing price of Rs762.80.
The final price was in the bottom half of the range, at Rs725, giving a 5% discount. The placement was completed before the opening of Indian markets yesterday and when trading finished yesterday the stock had fallen 4% to Rs732.
The bookbuilding started on Wednesday evening and ran through the night. Around two-thirds of the 25 participating accounts were domestic investors, with the remainder of the demand coming from Asia and Europe. Investors were almost exclusively long-only institutions, with a mix of both new and existing shareholders.
With an annual manufacturing capacity of 18.2 tonnes, UltraTech is one of the largest producers and exporters of cement in India. It makes ordinary cement, blast furnace slag cement, and pozzalana cement; as well as ready-mixed cement. Its export markets include Africa, Europe and the Middle East. It is a subsidiary of Grasim Industries, a diversified business which is part of the Aditya Birla Group.
The placement is best seen in light of a 2004 transaction. L&T used to effectively control UltraTech, but the company was sold to Grasim leaving L&T with the 11.5% that has just been sold. L&T continued to divest itself of related businesses, for example last year it sold its concrete business to Lafarge. As such, it has been waiting for the right opportunity to offload its remaining UltraTech stake. The clock was ticking since L&T had commited to sell the stake before the end of 2009.
The shares had already doubled in price this year, and some analysts were starting to say that India's cement companies are expensive and now was a good time to get out. "Even in a best case basis, the current valuations look stretched after considering the likely pressure on prices in [the second half of financial year 2010 and financial year 2011]... while the current momentum appears to be good, we recommend using it as an exit opportunity," said a recent research note by Alchemy Equity Research.
Part of the problem facing cement companies in India is overcapacity. Before the end of the year, four new producers will bring online an additional 9 million tonnes of annual capacity. On top of this, the existing producers will add a further 26 million tonnes of annual capacity in 2010. The pricing power of Indian cement producers will be severely weakened.
Before L&T could sell, it had to offer a right of first refusal to Grasim, which owns a 50.7% stake in UltraTech. If Grasim had called that option it would have exceeded an ownership threshold that would invoke regulations requiring it to make a tender offer for a further 20%. So, in effect, if it wanted to buy 11.5%, it would have to buy as much as 31.5%. Grasim decided not to exercise the option.
Citi was the sole bookrunner. The bank has been particularly active in the Indian placement market with six deals since the beginning of May. Yesterday's deal was its largest so far.
