Why did Suzlon sell German subsidiary Senvion?7 min read . Updated: 22 Jan 2015, 07:22 PM IST
The reason? To reduce debt burden, which stood at Rs17,323.23 crore on a consolidated basis, as of 30 September
Mumbai: Top technology. Market leadership. High profitability. Who would want to give up such a prized subsidiary?
Few, unless you are Suzlon Energy Ltd, the world’s fifth-largest wind turbine maker, which on Thursday agreed to sell its German arm Senvion SE to American private equity firm Centerbridge Partners LP for €1 billion, or around ₹ 7,200 crore.
The reason? To reduce debt burden, which stood at ₹ 17,323.23 crore on a consolidated basis, as of 30 September. Suzlon is expected to retire its high-cost rupee debt and save more than ₹ 500 crore in interest cost annually as a result of this sale.
But that’s the obvious part. The question is, do you sell your crown jewel for that?
Let’s start from the beginning.
When Suzlon met Senvion
It was in 2007 that Suzlon purchased Senvion, then called REpower Systems, for €1.4 billion, mostly with borrowed money. At that time, experts had hailed the acquisition as a smart move to gain technological expertise and a beachhead in Europe, since Suzlon was diversifying into various international markets.
With the acquisition, Suzlon hoped to secure superior technology, talented management and access to lucrative international markets, thereby turning into a global company.
The objectives were met, Suzlon executives said on Thursday.
“Senvion helped Suzlon Energy to optimize product offerings and market offerings. It helped in turning Suzlon Energy into leaders in offshore wind energy sector with a sharp focus in the markets," a person familiar with the development said. Senvion soon became one of the most profitable assets for Suzlon Energy. It now accounts for the bulk of Suzlon’s orders and revenue.
In February 2014, Suzlon Group unit REpower Systems SE changed its name to Senvion SE. The company has been using the name REpower under licence from a Swiss company since 2001.
According to a presentation dated 31 October on the Suzlon website, Senvion entered new high-growth markets such as the US, Canada, Australia and Romania.
And things went downhill
Interest costs ballooned, trapping Suzlon. The financial crisis that blew up in 2008 and the global slowdown that followed didn’t help. The company failed to repay $209 million of debt on 11 October 2012, after bondholders rejected its request for a four-month extension. The default was the biggest on convertible bonds by an Indian firm.
In May 2014, Suzlon restructured its foreign currency convertible bonds (FCCBs) worth $576 million, after nearly one-and-a-half-years of tough negotiations with bondholders. Consequently, it will issue approximately $485 million of bonds and the new restructured bonds will have a maturity period of five years and one day from the date of issue. These bonds will mature in 2019-20.
The company earlier restructured ₹ 9,500 crore debt through a corporate debt restructuring exercise. In January 2013, Suzlon’s lenders, a consortium of 19 banks, agreed to enhance working capital facilities to the group by ₹ 1,800 crore and announced a 10-year deferred repayment plan.
Suzlon Energy had four series of FCCBs of $200 million that was due in October 2012, FCCBs of $20.8 million due in October 2012, FCCBs of $90 million due in July 2014 and FCCBs of $175 million due in April 2016.
Suzlon Energy chairman Tulsi Tanti on 10 January said the company’s rupee debt stands at ₹ 8,000 crore and it will be reducing it by 50% by the end of this fiscal year. It also has an equal amount of debt in foreign currencies.
The second person quoted above said Suzlon Energy could not proceed with sale or part sale of Senvion in the past as the company had defaulted on various other obligations.
Looking for a way out
Selling non-core assets to raise cash is a no-brainer in better times, but not when the going is tough and the capital requirements are huge. Suzlon hoped to take Senvion public, or go for a part-sale. Neither worked out.
Buyers want good quality and operating assets. For instance, in September, Sajjan Jindal-controlled JSW Energy Ltd said it will buy three operating hydropower projects of Jaiprakash Power Ventures Ltd for a deal close to ₹ 10,000 crore. Private equity firms are keen to buying only operating assets in the case of cement, road and power. Lenders are not happy with selling non-core assets of companies.
A second person familiar with the development said the company examined various options to lower debt and balance the company’s capital structure.
“A complete stake sale route made sense to create maximum shareholder value. Also, Indian market and select emerging international markets were offering huge growth potential. But the company was unable to exploit the same owing to high debt on the books and liquidity crunch. The company needs to deleverage itself to safeguard its domestic business interests, too," he said.
The 100% stake sale of Senvion is in line with Suzlon’s strategy to reduce the debt and focus on the home market and high-growth market such as the US and emerging markets such as China, Brazil, South Africa, Turkey and Mexico, Suzlon said in a statement on Thursday.
“Suzlon Group is proud to have played a significant role in Senvion’s growth story, making it globally competitive driven by state of the art technology. Over the years, both Suzlon and Senvion have mutually benefited and added value to each other’s growth and development and sharing of best practices," Tanti said. He said Suzlon will focus on high-growth markets such as India, the US and other emerging economy markets.
Suzlon maintains the sale of Senvion was purely aimed at reducing the debt on its books.
Not everyone is convinced it’s as simple as that.
A senior consultant, requesting anonymity, said a clutch of lenders were putting pressure on Suzlon Energy to sell assets to cut debt.
“Senvion is the only marquee asset with Suzlon Energy that can fetch better valuations. Only good assets will get valuations. With lenders putting pressure on Suzlon Energy to cut down the debt, it had to sell Senvion without waiting for an IPO," he said.
The banking industry has seen a build-up of stressed assets, which has pushed banks to become more aggressive in recovering overdue loans. According to the Reserve Bank of India’s (RBI’s) Financial Stability Report, released on 29 December, stressed advances, or the sum of gross non-performing assets (NPAs) and restructured loans, increased to 10.7% of total advances in September from 10% in March last year.
A senior retired banker, who is closely tracking Suzlon Energy, said the company is selling its crown jewel, fearing further fall in valuations owing to the fall in oil prices.
“Suzlon Energy was facing three kinds of issues. Firstly, it was saddled with huge debt that it was trying to bring down by selling non-core assets. Secondly, the valuation of renewable assets or alternate fuels is likely to fall further with crude oil prices declining consistently. Thirdly, Suzlon Energy may not have secured necessary permissions to use cash reserve of Senvion from German lenders," he added.
In the last six months, price of Brent crude, the international yardstock for crude prices, has lost 55.11%, falling from $107.68 to $48.49 a barrel.
On Tuesday, Reuters reported that key oil producer Iran hinted prices could drop to $25 per barrel without supportive Opec action while oil prices are hovering near six-year lows after a seven-month long selloff on worries of a glut caused primarily by unexpectedly high production of US shale crude. The threat of a further fall in energy prices, and consequent fall in Senvion’s valuation was real.
Thursday’s transaction, that took the market by surprise, is expected to be closed before the end of the current fiscal year. The Senvion sale price of €1 billion is a sharp discount to the acquisition price of €1.5 billion.
“The deal is valued at €1 billion equity value in all-cash transaction and future earn-out of up to an additional €50 million (approximately ₹ 360 crore)," Suzlon said in a statement. The transaction is expected to be closed before the end of the current financial year, and is subject to regulatory and other customary closing conditions.
Senvion will license its off-shore technologies to Suzlon for the Indian market, while Suzlon will give Senvion its S111 - 2.1MW licence for the US market.
Tanti said the Senvion sale is in line with company’s strategic initiative to strengthen balance sheet, and the proceeds would be used for debt repayment, thereby reducing interest cost and augment business growth.
Stefan Kowski, managing director at Centerbridge, said Senvion is a company with impressive technology and leading market positions.
“The global market environment for renewable energies is promising for a wind turbine manufacturer, particularly for one of the most experienced players in the industry with onshore and offshore capability," Kowski said.
Tanti is optimistic, though.
“The Indian government’s significant thrust on renewable energy offers a conducive policy framework to the sector which Suzlon is best equipped to capitalize. Suzlon will offer its wind and solar hybrid technology solutions to contribute towards achieving country‘s target of ‘sustainable energy for all’. With our market leadership, right technology, proven project execution capabilities and best in class services, we are best positioned to tap the high growth potential in home market," the Suzlon chairman said in a statement.
He added that the company will able to improve the performance after Senvion’s sale as the interest expenses would be reduced and will have better ability to boost volumes. It is time, he said, to focus on Indian and select international markets.