By Roshni Jayakar

At 11.30 a.m., on February 16, 1998, the six board members of the Rs 1,105-crore Sterlite Industries (Sterlite) decided to make a Rs 64-crore open offer for a 10 per cent stake in the Rs 1,155-crore Indian Aluminium Co. (Indal). The offer, which was later modified to 20 per cent in response to a directive by the Securities & Exchange Board of India (sebi), sought to buy shares at Rs 90 each--nearly 36 per cent above the then-prevailing market price.

Within a few hours, in fact, by 2 p.m. the same day, a copy of the offer made by Sterlite landed on the table of Tapan Mitra, 59, vice-chairman and CEO, Indal. Mitra was, clearly, taken aback by the predator's audacity. Says Mitra: "We knew about Agarwal's interest in forging an alliance with us. But the offer came like a bolt from the blue."

Ten days later, on February 26, 1998, the Indal board recovered, and its promoter--the $7.77-billion Alcan Aluminium (Alcan) of Canada, which has a 34.60 per cent stake--announced that it will make a counter-offer which, according to the existing SEBI guidelines, has to be made within 21 days of the initial offer. Also, the same day, the board set up a three-member committee--comprising the 62-year-old chairman, S.M. Datta, N.J. Jhaveri, 62, and Deepak Parekh, 52--to suggest the recommendations that the Indal board can make to its shareholders on the Sterlite offer. The committee is expected to submit its report by March 12, 1998.

By the time the report comes out, Alcan would have made its counter-offer to buy the shares at a price of around Rs 105 each. And Sterlite is bound to revise its offer, upping the price to between Rs 135 and Rs 150. However, Anil Agarwal, 45, ceo, Sterlite, while refusing to disclose the upper price limit, says: "I don't think we are ambitious enough to quote a very high price (for Indal's share)." Indeed, a price of over Rs 150 per share will probably be unattractive for him since that would entail an outgo of over Rs 210 crore--which is equivalent to a-more-than 20 per cent promoters' stake in a Rs 3,000-crore greenfield aluminium project (at debt-equity ratio of 2:1).

Apart from the price, the success of the Sterlite bid would depend on being able to persuade the institutional shareholders--like financial institutions (FIs) and foreign institutional investors (FIIs)--to sell their stake. In addition, the company has to carefully counter the moves made by Indal and Alcan. For example, the Canadian major earlier tried to increase its stake to over 50 per cent through a preferential allotment--which is also a cheaper option. But, according to Suresh Thadhani, 58, CFO, Alcan: "We considered the option, but couldn't push it due to opposition from the FIs." BT learns that Indal may also look for a white knight once it has warded off the takeover threat.

But Sterlite is unlikely to give up the fight easily. For Agarwal--whose business has grown from Rs 16 crore in 1986-87 to Rs 1,105 crore today, partly due to his ability to spot opportunities and tap them successfully--has been stalking Indal for nearly two years. And he was waiting in the wings for the right moment to make his bid. Says Agarwal in an exclusive interview with BT: "Sterlite is looking at Indal purely as a commercial proposition."

Over the last two years, Agarwal has been in regular contact with Alcan. But the latter refused to entertain his overtures. Explains Thadhani: "Agarwal has met us, but our stand is firm. We also told him not to mistake (our) politeness for encouragement (to launch a takeover bid)." But Agarwal needed little encouragement, since his move appears well-reasoned with the gains and risks carefully calculated. Indeed, Sterlite may have chosen its target well. Consider:

undervalued stock. At the initial offer price--which will increase because Alcan is likely to make a counter-offer, and the scrip was quoted at Rs 95 on February 25, 1998, on the Bombay Stock Exchange (BSE)--even a 30 per cent stake would entail an investment of Rs 192 crore. In comparison, the replacement cost of Indal's new aluminium smelter in Orissa is nearly Rs 4,000 crore, and a similar stake in Hindalco would cost more than Rs 1,350 crore (at the BSE-quoted scrip price of Rs 608.50 on February 24, 1998).

indifferent promoter. In the past, Alcan has shown little interest in controlling Indal's operations. This was evident when it agreed to a reduction in its stake from 40 to 34.60 per cent due to the $60-million Global Depository Receipt (GDR) issue in February, 1994. Sterlite, obviously, thought that Alcan might be interested in selling its stake. But Thadhani says that Alcan was unable to maintain its stake since it was under tremendous financial pressure. Following three years of incurring losses, the company earned modest net profits of $96 million in 1993-94. But that still does not explain why the company made no move to hike its stake until a predator came knocking on Indal's door.

Even now, it is not clear where it will finally direct its dollars. It has evinced interest in picking up a 40 per cent stake in the Government of India (GOI)-owned Rs 713.01-crore Bharat Aluminium Co. (BALCO). The company has already been shortlisted for upto 40 per cent disinvestment by the GOI. Alcan is also committed to pick up a 20 per cent stake in the proposed Rs 4,000-crore export-oriented alumina project, Utkal Alumina International, in Orissa, which will be promoted jointly by Indal, Tata Industries, and the $13-billion Norsk Hydro of Norway.

adverse financials. In 1996-97, Indal's net profits plunged 48 per cent from Rs 114.20 crore to Rs 59.20 crore compared to the previous year, and operating margins came down from 15.60 per cent to 8.60 per cent during the same period. Its scrip price fell from a 52-week high of Rs 159 per share to Rs 66 on February 13, 1998. Given the trends in the domestic aluminium industry, analysts had a sell on the company over the last three months. Says Abhay Shanbag, 32, analyst, HSBC, Batlivala & Karani: "Economic loss coupled with demanding valuations forces us to continue with a sell recommendation." Thus, Agarwal may have reckoned that shareholders could be induced to sell their stock if the price was good.

What's more, a stake in Indal fits in with Agarwal's long-term business ambitions of achieving a dominant position in the non-ferrous metals--copper, aluminium, and their downstream products--sector. Already, Sterlite--which manufactures telecom cables, continuous-cast copper rods (CCRS), and aluminium-rolled products--with a marketshare of 40 per cent, is India's largest manufacturer of CCRS in the private sector. And its entry into aluminium--which began with the takeover of the ailing Rs 214-crore Madras Aluminium Co. (MALCO) in January, 1995--will be strengthened if it gains an entry into Indal, the largest domestic producer of aluminium rolled products (marketshare: 43 per cent).

An alliance with Indal--or Alcan, the world's second-largest aluminium producer--would be important for other reasons too. For instance, Sterlite has been toying with the idea of setting up an integrated Rs 3,000-crore aluminium smelter--along with a captive power plant--in Orissa. Agarwal may have realised that a stake in Indal--at Rs 128 crore for 20 per cent--is cheaper than setting up a greenfield smelter, in which even a 20 per cent stake would cost Rs 200 crore. The figure is based on the assumption that the debt-equity ratio for the Rs 3,000-crore venture is 2:1.

In addition, Agarwal thought that Indal could help Sterlite successfully implement the project after the problems it had with its Rs 1,000-crore 10-lakh tonnes-per-annum copper smelter commissioned in January, 1997. Initially, the copper smelter was moved from Ratnagiri (Maharashtra) to Tuticorin (Tamil Nadu) due to environment hazards. But Agarwal still completed it in record time--and within the amount earmarked for the project.

Later, the smelter faced stabilisation problems, and produced only 2,848 tonnes in the first six months of operation. The unit also closed down for 37 days in July-August, 1997, due to a gas leak and, thereafter, a blast destroyed one of its furnaces. In fact, the smelter is expected to produce only 25,000 tonnes in 1997-98 (ending September). Obviously, Sterlite cannot afford similar problems in its proposed aluminium venture.

With Alcan having spurned the Sterlite offer, Agarwal will have to woo other shareholders, including fis--with a 38.30 per cent stake; the GDR-holders with 12.20 per cent; FIIs, overseas corporate bodies, and non-resident Indians with 5.40 per cent; and the public's 9.50 per cent-- spread across 29,000 shareholders. The problem is that there is not enough free float (of shares) in the market. But Sterlite's 37-year-old CFO, Tarun Jain, is optimistic, and says: "The entire stake, apart from that of the promoter, is free float."

True, because if Agarwal had planned to purchase a minimum of 10 per cent stake--as he has publicly admitted--in Indal, he was banking on one of the institutions--or even the promoters--selling out since the public holding is only 9.50 per cent. Fortunately, unlike Alcan, the FIs have not outrightly rejected the offer. Says G.P. Gupta, 57, chairman, Unit Trust of India : "We have to evaluate how Indal--and its stakeholders--will benefit from the offer in the long run." Although Gupta maintains that the price in itself is not an important factor, a revised offer--which is inevitable since Indal's scrip price has jumped 24 per cent since February 16, 1998, and Alcan has decided to make a counter-offer--by Sterlite may seem more attractive than a price of Rs 90 per share. Indeed, there are precedents of the institutions having sold their stakes to corporate raiders once the price was scaled up.

A revised price may also be more attractive for the other shareholders--especially the GDR-holders and the FIIs, who together hold a 17.60 per cent stake in Indal. For example, the GDR-holders--who have paid $10.15 (Rs 314.65) per GDR in February, 1994--would have definitely refused an offer of Rs 90 per share. But a higher price--between Rs 135 and Rs 150 per share--may elicit a more enthusiastic response.

Agrees Kanu Doshi, 59, a Mumbai-based chartered accountant, who also feels that Indal has, virtually, no defence to stall Agarwal from grabbing a stake in the company: "Even if we assume that Alcan will not entertain the offer, and the FIs continue to support Indal's management, the new offer is likely to be lucrative for the retail investors and the FIIs (which include the GDR-holders)." In fact, Doshi says that if the Sterlite offer does not succeed, "it will make a mockery of the Takeover Code."

But will Agarwal succeed in his bid to gain a toehold in Indal? Coughing up the money--even if the offer price is raised, and he has to spend Rs 190 crore to buy a 20 per cent stake--is not a problem. For, Sterlite is sitting on a pile of cash--its cumulative cash generation as of June, 1997, was Rs 578 crore. In addition, the new copper smelter, despite the teething problems, is expected to add between Rs 300 crore and Rs 400 crore to this kitty every year. Says B. Srinivas Rao, 30, analyst, HSBC James Capel: "In the long run, we expect the (copper) smelter to be the cash driver."

What may turn out to be Agarwal's biggest hurdle is the opposition from Indal's management, which believes that there are no benefits from an alliance with Sterlite. Indeed, an anti-Sterlite campaign has already started questioning his claim that Indal can gain from Agarwal's managerial and entrepreneurial experience (see box). Indal spokespersons contend that the turnaround of MALCO--which earned cash profits of Rs 41 crore in 1996-97, and is considered an example of Agarwal's managerial abilities--was due to the concessions extended by the Tamil Nadu government. For instance, MALCO pays only Re 1 per unit of power while its competitors pay almost thrice the price.

But, then, Agarwal is a past master at the art of taking over companies. Minor obstructions are not likely to faze him. He first sighted MALCO as a possible takeover target in 1992, but purchased it only in 1995 when aluminium prices started going up. Of course, with Indal, he is up against a far more powerful adversary. And this time, his well-thought-out plans may lack sufficient power to smelt them into reality.

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