If Suzlon Energy Ltd succeeds in its bid for German wind-turbine maker Repower AG, it will end up with goodwill and intangibles of €1.19 billion (Rs6,783 crore) on its balance sheet. This amount is about the same as the €1.12 billion in combined sales of Suzlon and Repower in 2006.
Suzlon has bid €1.34 billion for Repower to try and trump an offer from Areva SA of France. Suzlon’s bid values REpower, which had revenue of €450 million, at 2.98 times its 2006 sales. According to documents filed by Suzlon with the German regulator, Suzlon has projected that the acquisition of Repower will boost its property, plant and equipment from €297 million to €317 million, an increase of just 6.73%.
If Suzlon succeeds in acquiring Repower, its net sales would rise by 35.21% to €1.12 billion, but its profit before tax would fall by 21.98% from €141 million to €110 million, due to the interest costs on additional financial liabilities of €669 million.
Some analysts believe that Suzlon closed the year ended March 2006 with negative operating cash flow of Rs354.02 crore and will see its earnings per share decline in case the Repower acquisition is successful.
“Being a debt-funded acquisition, the interest on the debt taken to finance the acquisition will be significantly higher than the German firm’s calendar year 2007 earnings of $25 million,” said a report by Mumbai-based brokerage Enam Securities. Enam has also downgraded its fiscal year 2008 earnings forecast on Suzlon.
Repower, a loss-making firm until recently, had an operating profit margin of 2.2% for the first nine months of calendar year 2006. In comparison, in the first nine months of fiscal 2006-07, Suzlon had an operating profit margin of 17.1%.
Suzlon is budgeting Rs171.43 crore for the takeover offer and the company’s consolidated debt-to-equity ratio would double from 1:1 to 2:1. Bhavin Vithlani, an analyst at Enam, says the Repower acquisition will have a severe negative impact on the balance sheet. “Given that one is near the peak of the cycle, a debt-to-equity ratio above 2:1 is not good for Suzlon.”
Also, Suzlon’s price-to-earnings ratio of 29.83 is lower than what it is paying for Repower. Vithlani believes that Suzlon’s chief competitors, such as General Electric Co. and Vestas Wind Systems A/S, would be able to boost capacity to cater to increased demand in the next one year, which will result in the company’s growth rate coming down from 35%-50% per annum to 15%-18% per annum.
Kirti Vagadia, head, corporate finance of Suzlon, says the company is not in a position to quantify the financial benefits that would arise from a combination of Suzlon and Repower.
“All I can say is that Suzlon’s cost of goods sold is 62% of revenues compared with 82% for Repower. The question is how quickly can we bridge this gap by making available our supply chain, which is the biggest constraint facing the industry today,” he says.
Currently, Suzlon has goodwill and intangibles of €312 million on its own balance sheet.
“Intangibles have to be amortized over their useful life and tested for impairment as per Indian accounting standards. In the case of a holding company with several subsidiaries, different companies treat the goodwill arising on consolidation of accounts differently. Some companies write it off in one year while others amortize over several years,” says Sanjay Aggarwal, national industry director, financial services, KPMG.
Suzlon’s Vagadia says that goodwill will have to be written off in case there is any impairment of any cash generating unit as per accounting standard 28 under the Indian Generally Accepted Principles of Accounting.
“Whether or not this goodwill will affect my net profit depends on whether the assets are treated as impaired or not,” Vagadia says.