L&T surged on Wednesday on an alternate proposal submitted by Grasim involving a vertical de-merger of the cement division into a separate company.

The scrip of the conglomerate jumped 7.5% to Rs 206 on BSE soon after news of the alternate proposal trickled into the market in early afternoon trades. The stock rallied on huge volume of 2.33 million shares on BSE by 13:40 IST. This is the highest daily volume recorded in the counter for some time now.

The L&T stock has been moving in a band of Rs 190-200 for quite some time now. A battle is believed to be going on between Grasim Industries and L&T after Grasim in October 2002 made an open offer for acquiring 20% stake in the company. The company till then had acquired 15% stake.

Grasim Industries today unveiled its alternate proposal regarding the de-merger of the cement division . Grasim has made a proposal for vertical de-merger of L&T's cement business into a separate company and for making an open offer for acquiring control over the proposed new cement company at a price of Rs 130 per share. Further, it has been stated by Grasim in the same proposal to L&T that the value (price of Rs 130 per share for the cement business) is based on a combination of methods, and, the ratio of equity value of the remaining L&T business to the equity value of cement business is 1.25:1.

On a sum of parts basis, assuming that a vertical demerger would create two separate entities, and on a relative basis, Grasim has valued the cement business of L&T at Rs 130 per share and the remaining businesses of L&T at Rs 162.50 per share. With that assumption, the equity value of L&T works out at Rs 292.50 per share. The valuation of Rs 292.50 per share for L&T is much higher than Rs 190 per share at which Grasim made an open offer for acquiring additional 20% stake in late 2002.

Grasim has clarified that the price of Rs 130 per share for the cement division was worked out based on the limited published information available to it. The same may vary depending upon further details, which may become available, or any other related development.

L&T said a few weeks ago that discussions on the proposal by CDC Capital Partners for participation in the equity of a possible L&T de-merged cement unit have been inconclusive. CDC Capital Partners evinced interest in picking up a 6.8% stake in the de-merged cement entity for Rs 291 crore (Rs 2.91 billion). Originally, the offer was to expire by 30 November 2002, but was subsequently extended to 31 December 2002.

CDC had proposed to invest in convertible bonds, which can be converted into equity shares at any time until December 2004, at its option. The proposal has some tough conditions, including an option to not only sell its entire equity stake after December 2007 but to also force L&T's management to sell about 44% (51% stake together with CDC's stake) in the cement entity. CDC proposes these rights, called, drag along rights, to safeguard its interest in the cement entity.

Likewise, CDC has insisted on rights to sell its stake, if L&T decides to offload shares through the secondary route between 2004 and 2007. According to this plan, CDC will get a 6.8% stake, shareholders will get 23.2% stake and L&T will have 70% in the de-merged entity.

Grasim's open offer to acquire an additional 20% stake in L&T has been put on hold pending a Sebi investigation. Grasim's open offer followed its acquisition of 15% stake in L&T. Sebi's investigation of Grasim centers around the issue of whether Grasim has acquired control of L&T. The probe was ordered despite Grasim's claim that it would not seek any change in the management control of L&T.

Recently reports had surfaced that the Securities and Exchange Board of India is likely to permit the company to go ahead with its open offer for acquiring an additional 20% stake in L&T albeit with some more disclosures. These disclosures would centre around its deal with the Reliance group, from whom Grasim Industries had bought slightly over 10% shares at a price of Rs 306 per share in November 2001.

L&T has two divisions cement and engineering & construction. Grasim's interest is said to be mainly in the cement division.

BSE code: 500510