PROLEC-GE, a joint venture between GE and Mexican group Xignux, has signed a share purchase agreement with Indotech Transformers to acquire the entire 54.35% (5.7mn shares) promoter stake in the company.
PROLEC-GE’s offer price is Rs406/share, which is at a premium of 46% to the current market pr ice and values the company at Rs4.3 billion. It has also announced an open offer to acquire a further 20% in Indotech at Rs406/share.
In addition, it has signed a non-competing clause valid for three years with Rs450 million as compensation to the promoters. Including the non competing clause, the pricing of the deal rises to Rs480/share.
The entry of PROLEC-GE into the Indian markets reiterates the long-term growth potential of the industry.
We believe that at the current market price, investors can hold the stock and tender it during the open offer.
Even if the price was to fall to Rs175 (4x FY09E earnings), the average value would be close to the current market price of Rs278 (assuming an acceptance ratio of 43%), making it worthwhile to wait for the open offer.
However, if the stock rises by a further 20 %, i.e. close to Rs320, investors should start selling in the market as the average for the open offer and current market price works out to Rs333.