Suzlon's REpower buyout may aid synergies

Wind power equipment major Suzlon Energy's quest to buy controlling stakes in other corporates continues, its burgeoning debt notwithstanding.

The company late Monday, announced its intention to initiate proceedings for buying out shares of minority stakeholders in its German subsidiary REpower Systems.

If successful, Suzlon Energy, through its subsidiary, would have full control over the off-shore wind equipment specialist Repower, thus enabling access to the German player's portfolio of products and more importantly technology. Added to it, the reasonably rich cash status of REpower and its minimal debt balance sheet could be more effectively utilised by Suzlon. This was not possible earlier, with Suzlon holding a less than 100 per cent stake.

Squeezing-out

After Suzlon bought the German wind maker in FY-08, it upped its stake to 90 per cent and more recently to 95.16 per cent. Under the German law, a shareholding of over 95 per cent allows the majority stakeholder to initiate what is known as ‘squeeze-out proceedings' towards minority shareholders. This would require approaching the local district court requesting for an independent valuation. Such valuation, if agreeable to the court, would then be the price at which Suzlon will buy the remaining stake from the minority shareholders. Such a process, is known to take up to a year or less.

REpower has been making strides in the Europe and US markets despite the slowdown, thanks to its offshore wind equipment capabilities. As of December 2010, the German player had an order book worth over Rs 18,000 crore. The buyout may make it easier for Suzlon to synergise operations as German laws have restricted the same until the 95 per cent holding mark was reached.

Suzlon has in fact been firming up plans to manufacture REpower's 2MW wind turbines in India for export. The buyout may provide better synergies and a low cost operation base in India, improving profit margins of REpower. Players in Europe are known for their high-cost structure.

$150-m bonds issue

This said, Suzlon has simultaneously announced sale of $150 million 5 per cent foreign currency convertible bonds due by 2016. The same can be raised by another $50 million. The conversion price of the bond will be Rs 54.01, at an 11 per cent premium to the previous close. While the company has not stated that the proceeds of the FCCB would be used for the REpower buyout, the timing of the issue does suggest it could be deployed here. The other option would be for Suzlon Energy to sell its remaining stake in Hansen Transmission.

While Suzlon's debt equity ratio of 1.6 (as of December 2010) may not seem threatening, the company has about $35 million and $20.8 million FCCBs coming up for redemption in June and October 2012 respectively. Given that the conversion price for these are well over Rs 90, the risk of redemption remains high.

REpower's cash in hand at Rs 1,740 crore and a relatively minimal debt balance sheet could provide some solace to Suzlon if the company is able to wind-up the buyout by the end of this fiscal. Suzlon has not made any provision for the premium payable on FCCBs (Rs 527 crore) if they have to be redeemed. This remains a contingent liability. The Suzlon Energy stock declined about 1 per cent on Tuesday, probably reacting to the news of the company adding on more debt.

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