A couple of months after it began negotiations with potential suitors to sell its electricals and automation (E&A) division, Larsen & Toubro (L&T) is changing its stance.
According to sources involved in the negotiations, instead of an outright sell-out or a change in control immediately, L&T is now exploring a minority stake sale. It has entered into an exclusivity arrangement with Eaton Corporation of the US, which will lapse by the end of this month unless extended.
Last month, the board of the Rs 45,000-crore engineering company had sought shareholders’ approval to transfer the division into a subsidiary.
The sources said L&T was earlier expecting a valuation of around $3 billion (Rs 13,500 crore) for the division, more than three-and-a-half times its current sales. But that would have included a premium for the change in control. In a minority stake sale, the upfront premium payout will be negligible or nothing at all. In this scenario, the discussions over the valuation are still underway.
Bank of America Merrill Lynch recently valued the business at about Rs 8,900 crore. Eaton has appointed E&Y to do the financial diligence for it.
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L&T Chairman and Managing Director A M Naik said, “There is no truth in these rumours. We are not selling the division. Various world majors present in similar kind of business have started spreading these rumours, as some of them have vested interests like taking away our clients, employees. The rumours started in the first place because we wanted to make the division into a separate subsidiary and ballot voting was asked for. The formation of the subsidiary is in line with the strategic plan we outlined sometime ago, that various businesses will be autonomous and will have to withstand market competition.”
An Eaton’s spokesperson in India told Business Standard: “As a matter of policy, we do not comment on rumours and speculation.”
But most believe the minority stake sale at this point will only be a precursor to a gradual process of a bigger stake sale, which may eventually lead to a change in control.
“The process will be gradual. The board is already seeking shareholders approval for the transfer of the business to a subsidiary. So, after a minority stake sale, both sides will take a call on how things will pan out. After that a final call can be taken,” said an official in the know. The shareholders’ approval for hiving off the division is expected to come in by May-end.
But another source said no potential suitor, including Eaton, will be keen to come on board without a minimum 26 per cent stake.
As a part of its business restructuring, L&T was looking at realigning its operations and focus more on projects rather than on products. The engineering and construction segment accounted for more than 85 per cent of sales in 2009-10 at Rs 31,650 crore. It has, therefore, been exiting smaller non-core businesses and also realigning its existing joint ventures (JVs). Recently, it exited its 50:50 JV with Case for making earth-moving and mining equipment. L&T had earlier sold its non-core businesses such as petrol pump vending machines and cement.
Some L&T watchers, however, said the idea of an outright disinvestment of the E&A division faced opposition from labour and officers’ unions within. Some even said institutional investors like LIC, too, had reservations about big-bang restructuring. But L&T officials said the company had addressed all concerns of its shareholders.
Set up in the 1960s, the E&A division makes switches, switch boards and gears, and circuit breakers, among other things. It has centres in Mumbai, Ahmednagar, Mysore, Faridabad and Coimbatore. In 2008-09, L&T bought TAMCO, which has facilities in Malaysia, Indonesia, China and Australia, to expand the vertical. It also opened centres in Saudi Arabia and Dubai. In India, it is the market leader. The business has annual sales of around Rs 3,700 crore and contributes seven per cent to L&T’s turnover.
Earlier, L&T had plans to expand the division beyond a billion dollars. But for the last one year, after the retirement of wholetime director and president R N Mukhija, the division has not been represented on the board. It is headed by S C Bhargav.
Analysts say competition from multinational companies has made long-term growth in the segment difficult. The division used to get big orders from the Gulf. These, too, have been hit after the Dubai debt crisis.
Prices of inputs such as copper, have also hit record highs. Higher input costs are not always passed on to consumers due to tough competition.
But for Eaton, India offers an opportunity for fast growth. Ohio-headquartered Eaton is a diversified power management company. It saw sales of $13.7 billion in 2010.
