Nagarjuna gives up on Blackstone, mulls alternative funding options

Nagarjuna gives up on Blackstone, mulls alternative funding options

Hyderabad: As the result of a sharp fall in its share prices, Nagarjuna Construction Co. Ltd says it is no longer expecting private equity giant Blackstone Group to come through on a promised $50 million (Rs243.5 crore) investment which, in turn, had been held up by regulators.

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For Blackstone, while the delay reflects continued run-ins with the Indian government on investments, in this case, the ongoing 14-month delay might have actually helped the firm potentially escape from an investment that could have cost it substantial money because of a subsequent plunge in the Indian stock markets.

If it had got approval from the Foreign Investment Promotion Board (FIPB), Blackstone would have paid Rs204.99 crore for exercising rights on 9.11 million warrants offered to it at the equivalent of Rs225 a share of Nagarjuna. But thanks to plunging markets, the same stake would have been worth Rs64.64 crore at current market price of Nagarjuna shares, which are at least 68% below that offer price.

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“We don’t think Blackstone will prefer to exercise warrants at offer price (of) Rs225 a share when the stock is available at much cheaper price in the open market," said Nagarjuna executive director A.G.K. Raju. “Accordingly, we have started the exercise of exploring alternatives to raise funds."

Raju said fund-raising options before the company include raising debt, issue of bonds or seeking external commercial borrowing. “A decision on fund-raising, including the size of funds requirement, will be taken in the next four-six weeks," he said.

Nagarjuna, which had Rs3,478 crore in revenue and a profit of Rs162 crore in the year ended March, had made a preferential offer of convertible warrants to Blackstone and its own promoters last year to get equity funds of around Rs260 crore for expanding its business. While Blackstone was to contribute Rs204.99 crore, promoters were to contribute Rs54.25 crore by exercising convertible warrants offered on a preferential allotment basis.

The promoters, who were allotted 2.5 million optionally convertible warrants at a conversion price of Rs217 a share, and put down a 10% down payment, have recently decided to forgo that amount and not to exercise the warrants.

Instead, they have started buying Nagarjuna shares through open market purchases and have already acquired around 1.2% holding to take their total stake to 23.63%, the company said.

Raju says promoters were also buying shares in the open market to help support the market price of Nagarjuna shares. The promoters can acquire up to 5% stake in the company through open market purchase in each financial year under the creeping acquisition guidelines prescribed by the Indian stock market regulator, Securities and Exchange Board of India.

Blackstone, which didn’t put down 10%, holds about 9% stake in Nagarjuna, having paid Rs410 crore to buy 20.2 million shares of Rs2 each at a premium of Rs200.50 in September 2007. That stake is also now worth Rs143.31 crore, based on Nagarjuna’s Wednesday closing price of Rs70.95 a share on the Bombay Stock Exchange.

Following that investment, Blackstone India’s senior managing director and chairman, Akhil Gupta, was inducted on the board of Nagarjuna, first as an additional director and subsequently, at the last annual general meeting of shareholders, as a director.

While the Nagarjuna management has all but written off Blackstone’s desire to pick up the warrants, Gupta, for his part, isn’t ready to say so.

“It is premature on our part to comment (on exercising warrants) because we do not have to make a decision for exercising our warrants for 18 months from the date on which we subscribe to the warrants," Gupta wrote in an email. “We have not subscribed to the warrants yet because we are awaiting FIPB’s approval, which we expect will come through in the due course of time."

“We believe that these warrants would possibly not get converted to equity, as the warrants are deeply out of the money," says Shailesh Kanani, an analyst with the Mumbai-based broking firm Angel Broking Ltd.

The delay also puts Blackstone in an interesting position of being unable to buy Nagarjuna shares at lower prices in the open market.

“We cannot currently buy NCC shares in the market because we already own close to 10% of the company’s shares, which is the maximum allowable for an FII (foreign institutional investor)."

It is unclear why FIPB has taken so long on the proposal.

But this isn’t the first time that Blackstone has run into regulatory delays. Its proposal to pick up a 26% in the publisher of the Eenadu newspaper, one of south India’s largest, for $275 million, or about Rs1,080 crore, in what was then the single largest foreign direct investment deal in print media, fell prey to political and other pressures and didn’t get timely clearance from the finance ministry, despite having necessary approvals from all other ministries and departments that need to sign off on such deals, including two all-clear recommendations from FIPB.