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S. Vaidya Nathan

SHAREHOLDERS of Alstom should reject the open offer, as it is at a substantially lower price compared to the value at which the stock trades.

The open offer is at Rs 75.03 per share while the stock now trades in the vicinity of Rs 200. The open offer is for 20 per cent of the equity of Rs 39.8 crore.

The Areva group of France has made the open offer; it is a major player in the energy, power transmission and distribution and services business. It has agreed to acquire the stake held by the Alstom group of France at Rs 30.45 per share. The acceptance level in the open offer would determine the number of shares that it would buy from Alstom.

This is to ensure that the norms of minimum public shareholding for continued listing are complied with. As acceptance, if any, is likely to be at marginal levels in the open offer, Areva may end up buying the entire stake of 66.3 per cent held by the Alstom group.

The stock price had been in the sub-Rs 100 range in 2004 and till April this year when the open offer was announced.

Subsequently, the price has been on a relentless upward trend accompanied by a surge in volumes. It almost trebled in April and has, subsequently, hovered close to the Rs 200-mark. There is a possibility that there may be a downward bias on completion of the offer, as expectations of a price revision have not materialised.

The Areva group is likely to restructure Alstom's operations to ensure that it is a pure transmission and distribution play in the power sector. Its presence in motors has been a drag on earnings, as it is a low-profitability business.

This business is likely to be vested with a subsidiary of the Areva group and there could be a sizeable one-time cash flow.

Such a development may also be accompanied by a reduction in capital to the extent it is attributable to the motors business. Even if this does not materialise, the earnings profile is likely to improve and could support the higher valuation enjoyed by the stock.

Alstom's revenues have more than doubled over the past three years aided by the improvement in the business environment for the engineering and power sector. It has turned around from being a loss-making entity a few years ago and now makes healthy profits. The stock trades at a price-earnings multiple of about 35 times its FY 05 earnings.

With sizeable investments likely to flow into the power sector and more particularly to enhance the quality of transmission and distribution, the business outlook for Alstom is bright.

The spurt in stock price has ensured that the superior growth prospects are largely priced in. But we would not suggest a sell at this stage; we would prefer to take a call after the ownership shifts to the Areva group and the restructuring exercise is completed.

The open offer closes on June 18. The manager to the offer is HSBC Securities and Capital Markets. The public announcement is available on the Web site of SEBI (www.sebi.gov.in).

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