Suzlon Energy Ltd’s shares rose by around 3% on Tuesday, even though the broad markets were weak, thanks to news reports that Spain’s Gamesa Corporacion Tecnologica SA may buy a majority stake in the firm. The unconfirmed reports said the deal to buy out Suzlon’s current promoters would be struck at Rs67 per share, excluding a non-compete fee of Rs10 per share. This represents a 20% premium over Tuesday’s closing price of Rs55.75 on the National Stock Exchange. Note that Suzlon’s shares have already risen by around 13% in the past eight trading sessions.
Suzlon’s management has denied the deal, saying the reports are speculative in nature and inaccurate. But for minority shareholders, such a deal would be akin to a lifesaver. Suzlon’s business has languished since the global slowdown. While the global wind power industry has been affected badly in the past two years, Suzlon’s woes have been accentuated because of company-specific problems. Suzlon suffered because of some blade crack issues with some of its wind turbines in late 2007. While the company has addressed this problem, international order flow continues to be negligible. This is because of its huge debt. As one analyst with a foreign brokerage points out, customers seem to be worried about Suzlon’s sustainability.
After all, getting into a wind power generation contract isn’t a one-time affair which ends with the installation of the equipment. The equipment needs to be serviced and maintained, and it is essential that the wind power company is still in business.
Graphic: Yogesh Kumar / Mint
International order flow has all but dried up for Suzlon. In the past few quarters, order flow from the domestic market has been strong, but this is hardly enough for a company that has built up a global wind turbine capacity of 4,200MW. Unless global orders pick up, capacity utilization will be low and profit generation insufficient to service its huge debt. In this backdrop, a change of ownership and, perhaps, in branding could help the company. The promoter group could use the opportunity to avoid a debt trap, provided it gets a good exit price. Minority shareholders would gain, too, albeit to a lesser extent without the non-compete fee. In any case, in the long run, Suzlon stands a better chance of survival and success with a change in ownership.
While all this sounds good, the question is, if the deal does happen, how will Gamesa fund the acquisition? At the end of September, Gamesa had a net debt position of around €300 million (Rs1,800 crore today).
While the firm did well to reduce its net debt position from €716 million from a year ago, it still is already indebted. Buying out Suzlon’s promoters at the reported price of Rs77 a share would cost it €1.3 billion and making the mandatory open offer would cost it another €400 million.
Funding this would be a tall order, especially at a time when the wind power market is weak. Gamesa currently has a net debt/earnings before interest, tax, depreciation and amortization (Ebitda) ratio of 1. If it funds the transaction through debt, its net debt/Ebitda ratio would rise to 6.7 times, a definite red flag as far as lenders are concerned. For the deal to happen, Gamesa may have to rely on a strategic partner/investor to chip in with meaningful funding.