The board of Larsen & Toubro today approved a plan to demerge its cement business into a separate subsidiary and cede management control to Aditya Birla group flagship Grasim Industries, ending an eight-month tussle over India's largest cement company.

The scheme will eventually result in the Birlas taking a 51.5 per cent interest in a 16.5 million tonne company for a net investment of Rs 2,200 crore (Rs 22 biilion).

The Birlas will then emerge as India's largest cement group with a combined capacity of 31 million tonnes. Kumar Mangalam Birla said at the end of the board meeting: "It is a win-win situation for both companies."

In a complex three-step arrangement, L&T will first hive off the cement business (CemCo) in which the parent engineering company will hold 20 per cent, while the remaining 80 per cent will be distributed among L&T shareholders in proportion to their existing holding.

Grasim, which now holds 15.74 per cent in L&T, will get around 12.6 per cent in Cemco while the institutions will hold around 32.6 per cent.

Subsequently, in stage II, Grasim will buy 8.5 per cent of L&T's stake in CemCo at Rs 171.30 a share, or a total of Rs 362 crore (Rs 3.62 billion), taking its own stake to over 21 per cent and triggering an open offer.

In stage III, Grasim will make a 30 per cent open offer at the same price to Cemco shareholders, resulting in an outgo Rs 1,640 crore (Rs 16.4 billion), with the holding crossing 51 per cent.

The stake of the FIs will decline to around 18 per cent after the offer and they will receive Rs 617 crore (Rs 6.17 billion) in cash. One of FI nominees on the L&T board said: "The institutions are happy that the interests of all shareholder groups have been protected."

In a concurrent arrangement, L&T will set up an employees' trust which will buy out the Birlas' entire equity in the main engineering company at Rs 120 a share following which the Birla nominees are likely to step down from the L&T board. It will also result in a cash inflow of Rs 470 crore (Rs 4.7 billion) into Grasim.

The modalities on the formation of the trust and its finances are yet to be worked out. A M Naik, L&T managing director & CEO said: "We will be buying the Birlas out at a good price, as Icra has valued the engineering business at Rs 129 a share."

The arrangement will also address L&T's apprehensions of a declining net worth, as the cash flow of Rs 362 crore (Rs 3.62 billion) for its 8.5 per cent in Cemco will significantly boost its finances. Also, it will be free to sell the remaining 11.5 per cent in Cemco in the market if Grasim does not chose to buy it.

JP Nayak, L&T's head of the cement business, said, "With this structure, L&T can take up orders of up to Rs 10,000 crore Rs 100 billion)." Cemco will take away Rs 1,863 crore (Rs 18.63 billion) of debt.

L&T chief Naik said L&T would also have two directors on Cemco's board till L&T holds shares in the company. The top management of the cement division would have the option of returning to L&T.

Grasim's President and CFO DD Rathi said Grasim can use the L&T brand till June 30, 2004, or till the completion of all regulatory modalities, whichever is later. Saurabh Misra, the AV Birla group's head of cement business, said, "The two entities (Grasim and Cemco) will aim at cost savings of Rs 90-100 crore a year."