The Great Offshore Ltd takeover saga finally seems to have come to an end. ABG Shipyard Ltd has sold its stake in the company, which signals that it has opted out of the race to win control of the oilfield services company. This clears the way for Bharati Shipyard Ltd to consolidate its ownership position.
Great Offshore’s shares fell by 6% on Wednesday, to adjust for the fact that the bidding war has come to an end. At the same time, shares of ABG Shipyard and Bharati Shipyard rose by 9% and 10%, respectively, with investors expressing relief that the bidding war has ceased.
But ABG and Bharati are in starkly different positions. ABG has profited from its involvement in Great Offshore. The average purchase price of the 3.08 million shares it held in the company is less than Rs500, while it sold them for about Rs575 per share.
Bharati Shipyard now has the comfort of knowing that Great Offshore, one of its largest clients, won’t end up being controlled by a rival company. But this has come at a very high cost, since it has been raking up debt to increase its stake. Already, its debt-equity ratio has jumped from 0.74 in March 2008 to 1.43 in March 2009. According to an analyst at a domestic brokerage who did not want to be identified, the debt-equity ratio is likely to have reached 1.8 by the end of September, considering that it has increased its stake in Great Offshore further this fiscal year.
Bharati said on Wednesday that it will now make an open offer to Great Offshore’s shareholders for a 20% stake at Rs590 per share. This will cost about Rs462 crore, which will take its debt-equity ratio to well over 2. At the end of March, the company’s debt stood at Rs1,003 crore.
Graphics: Ahmed Raza Khan / Mint
On the face of it, the acquisition doesn’t look very expensive. Great Offshore is estimated to report earnings of about Rs67 per share this fiscal. At this price, the company is valued at around 8.8 times earnings. According to the analyst, offshore services firms should ideally get a valuation of 7-8 times earnings. Keeping in mind that Great Offshore would be gaining control of the company, the premium seems to be justified.
The main problem about the acquisition, then, is the high debt position Bharati will end up with. The fact that its own business has been progressing rather slowly could make matters worse. Because of the slowdown, execution of existing orders has been delayed and new order intake has come to a standstill.
Things are unlikely to turn around quickly given the overcapacity in the system. This could lead to financial woes at Bharati. But it’s interesting to note that its share price performance has mimicked that of competitor ABG Shipyard over the past two years. That fact that it (and not ABG) is now saddled with the debt related to the Great Offshore acquisition could lead to underperformance in the future.