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Sunday, Jun 23, 2002

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Wartsila: Accept

Sowmya Krishnan

WARTSILA Corporation, together with Wartsila Technology, has made an open offer to the shareholders of Wartsila India to acquire 15.24 per cent of the company's outstanding equity at Rs 120 per share. The two companies together hold 84.76 per cent of Wartsila India. The offer opens on May 27, 2002 and closes on June 25, 2002.

Wartsila India shareholders have no other choice but to tender their shares, as the offer is made with the intention to buy out 100 per cent of the company's equity and delist it from the bourses. In case the shareholders reject the offer, the acquirer has the choice to mop up the residual shares through creeping acquisition or through negotiations.

The acquirers have proposed to come out with a third open offer if it is unable to mop up the entire equity through this offer. It is not advisable to wait for the third open offer, as it is highly unlikely that the acquirers might come out with a better price. Moreover, investors might also be missing out on an alternate investment opportunity till then. The acquirers have proposed to delist the company from the bourses if the shareholding falls below 10 per cent of the equity.

Therefore, it is advisable to tender the shares despite strong fundamentals and low price.

The parent company earlier made a open offer in September 2001 for 49 per cent of the equity. Later, it raised its shareholding to 84.76 per cent.

To consolidate its position, it further mopped up shares from the open market through the creeping acquisition route after the public announcement. Only 15.24 per cent of the equity is currently under free float.

The financials for the year ended December 2001 do not reflect the true potential as the performance was lacklustre due to the slowdown in the economy. The company is engaged in the business of providing turnkey power solutions for industrial and marine applications. India is still a power- deficit country and, hence, the prospects for power generation business appear bright.

Wartsila India, being a fundamentally strong company, is well-placed to cash in on this opportunity once the economy is back on the growth trajectory.

Considering this, the offer price at Rs 120 does not reflect the true potential of the company's future earnings.

The open offer is timed such that it can take advantage of the low market price. At Rs 120, the stock trades at a price to earnings ratio of 11.9 times its December 2001 earnings, which is quite low.

Despite the low price, investors do not have any other option but to tender their shares. The offer opened on May 27 and closes on June 25. The manager is DSP Meryll Lynch.

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