Shipbuilder Bharati Shipyard Ltd has stepped in as a saviour for Great Offshore Ltd’s highly leveraged promoter group, but could itself end up as over-leveraged in the process.
Great Offshore’s promoter group led by Vijay Sheth has pledged 5.53 million shares amounting to 14.88% of Great Offshore’s equity capital as collateral against a Rs200 crore loan from Bharati. At Great Offshore’s current market price of Rs278, these shares are worth only Rs154 crore.
Normally, when shares are pledged as collateral, lenders apply a so-called haircut to account for a possible depreciation in share value. In other words, for a loan of Rs200 crore, lenders would usually demand shares worth Rs400 crore as collateral. Even if the value of the shares dips by half, they can be sold to recover the loan. But here the collateral is worth a lot less even at the time of granting the loan. The shares were worth Rs131.5 crore when they were pledged as collateral.
Given this backdrop, news reports suggesting that Bharati may actually be scripting a takeover of Great Offshore seem plausible. But a change in management control would entail an open offer, and that too, at a considerable premium to the current market price.
Based on the assumption that a 14.88% stake in Great Offshore cost Bharati Rs200 crore, the open offer would have to be made at a price of Rs362 per share and an offer for 20% of the firm’s capital would cost Rs268.8 crore.
At the end of March, Bharati had a manageable debt-equity ratio of 0.75. The Rs200 crore it has lent to Great Offshore’s promoter group would have been raised through debt, increasing its debt-equity ratio to about 1.1 times. If an open offer has to be made, another Rs268.8 crore has to be raised, which will take its debt-equity ratio to nearly 1.6 times. According to an analyst with a domestic brokerage, Bharati would not be able to manage this.
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If Bharati actually wants to take over, the markets’ primary concern would be gearing and not so much the fact that it’s paying a high premium to current market price. When the company entered into an agreement with Great Offshore’s promoters only in early December, the stock traded at around Rs235, but less than a month before that, which is when details of the deal may have been deliberated upon, the stock traded at around Rs360.
Seen in that light, the premium doesn’t seem to be too high. After all, Bharati would also be getting management control of the company and anyway have to pay a premium to get in the driver’s seat. The concern, as pointed out earlier, is that as a result it would end up as a highly leveraged entity itself.
Graphics by Ahmed Raza Khan / Mint