In a master stroke, the Welspun Group seems to have addressed its funding requirements even as it was restructuring the holding pattern of its units. Private equity firm Apollo Global Management Llc will infuse Rs2,250 crore, around two-thirds of which will be invested in the listed pipe-making firm, Welspun Corp. Ltd. Apollo will invest through a preferential allotment of compulsory convertible debentures (to be converted into shares after 18 months), and global depository receipts. After the dilution, Apollo will hold around one-fifth of the expanded capital of Welspun Corp., while the promoter’s stake will reduce to about 30%.
Interestingly, the transaction will facilitate the smooth transition in ownership of Welspun Group’s unit, Max Steel, which was acquired from the Aditya Birla Group a few years ago. Apollo will buy out 12.5% of the promoters’ stake in Max Steel, while the balance 87.5% held by the promoters will be bought out by the listed entity, Welspun Corp. Analysts say that the promoters’ exit from the steel unit will be at nearly three times the investment made at the time of the acquisition. An added positive is that Apollo might infuse funds into Welspun Group’s infrastructure unit, too.
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Indeed the long-term horizon for pipes is promising as oil and gas and infrastructure sectors are long-term bets. Hence, fresh funds raised will be ploughed into expanding downstream operations such as setting up a steel-slab entity, which will make the group an integrated pipe player. However, the near-term outlook is not rosy as Welspun Corp.’s order book at the end of the March quarter was lower than a year ago. Besides, increasing material costs and a highly competitive environment have led to an erosion in margins, too.
However, Welspun Corp. shares jumped 3% on the bourse after the announcement of the deal. What took the Street by surprise is that Apollo’s investment comes at a time when its shares were weighed down after a directive from the market regulator against its promoters for price manipulation in December, which saw the stock plunge. Retail investors have not had a reprieve since then.
Will Apollo’s investment serve to be a vote of confidence in favour of the company and its business? A report by Fortune Research reiterates that the stock will be under review until the firm (promoters) gets a clean chit from the Securities and Exchange Board of India.
Graphic by Sandeep Bhatnagar/Mint
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