Pipe maker Welspun Gujarat Stahl Rohren Ltd’s acquisition of MSK Projects Ltd will not only strengthen its presence in the pipes business, but will also allow it to enter the growing infrastructure segment.
Welspun, with annual revenue of Rs7,700 crore, is the second largest global manufacturer of steel pipes and plates used in oil and gas, water, and infrastructure applications. The Welspun management has been scouting for growth avenues to deploy its cash balances.
According to some analysts, the scope of expanding its pipes business is limited, given the demand-supply situation. In 2008-09, Welspun had cash of Rs950 crore, and would have added another Rs600 crore to its kitty through free cash from operations during 2009-10.
The acquisition could help the company leverage the pipe-laying execution skills of MSK for the oil and gas sector. About 40% of MSK’s order book is in the oil and gas projects business where its clients include public sector units.
“The acquisition helps Welspun to move closer towards its objective of offering end-to-end solutions for the line pipe segment as also an entry into infrastructure space,” says Chirag Shah, analyst at IDFC-SSKI Securities Ltd.
MSK has a strong presence in the infrastructure segment, with nine road projects to its credit and 2008-09 revenue of around Rs323 crore. Welspun’s higher net worth of around Rs3,270 crore, compared with around Rs300 crore of MSK, will help the latter bid for larger projects. At present, it has an order book of around Rs500 crore.
Higher competition in the pipes business of Welspun has seen slower order accretion during 2009-10, than in the last five years. The order book stands at around Rs7,800 crore, a little more than one year’s revenue, whereas industry peers have about two-three times the revenue.
Welspun, through its 100% subsidiary, has made an open offer at Rs130.50 per share to MSK’s shareholders for around 20% of the company’s shares. After acquisition, Welspun will hold 75-79% of MSK’s equity, by buying out promoter’s equity, a preferential share issue and the open offer.
This will entail a cash outflow of around Rs400 crore, which can be funded through internal accruals. This is assuming that the open offer is fully subscribed. MSK’s current market price is Rs144, and unless the share price drops materially, investors may not tender their shares in the open offer.
According to Anand Rathi Research, the acquisition is earnings accretive—the brokerage has raised its earnings estimates for 2010-11 and 2011-12 by 4-6%. Still, Welspun’s shares haven’t budged from the Rs275-280 levels since the deal was announced.
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