Mumbai: It was early in the New Year and Nikhil Gandhi was near the point of desperation. The founder-chairman of Pipavav Defence and Offshore Engineering Co. Ltd, India’s largest defence shipyard with a licence to make warships, was running out of time. Since September 2014, he had been under pressure from his company’s creditors to do something about its 7,000 crore debt.

Creditors led by IDBI Bank Ltd wanted Mumbai-based Pipavav Defence to undergo a corporate debt restructuring (CDR), which would entail a lower interest rate, a longer repayment period, or the addition of overdue interest to the principal.

Gandhi resisted the idea, given the negative implications for the company’s valuation. The lenders relented, but the respite was temporary.

Come January and he had three clear options before him: infuse more cash, of which he had none, into the company and retire debt; bring in an investor (some cash again) to appease the lenders; and lastly, accept the CDR proposal.

“Banks did not want to carry on a negative asset. They wanted the promoters to infuse more cash into the company. But the promoters were not in a position to do so," says a person familiar with the situation who requested not to be identified because he is not authorized to speak with the media.

Sometime in mid-January, Gandhi set himself a deadline of 31 March for divesting a stake in the company. And then he began to try and find a buyer for Pipavav Defence.

Gandhi, 55, a Kolkata-born entrepreneur, reached out to the Reliance Group, led by Anil Ambani. And then to Mahindra and Mahindra Ltd (M&M). The Hero Group. And the French naval defence company DCNS SA. All were interested in the defence sector. And in Pipavav Defence.

“It is just that they approached us," says an official at Hero who also requested not to be identified because he is not authorized to speak with the media. “But our discussion was at a very, very raw stage."

On 12 February, Reliance Infrastructure Ltd, part of the Reliance Group, informed BSE that it had set up three subsidiaries—Reliance Defence Systems Pvt. Ltd, Reliance Defence Technologies Pvt. Ltd and Reliance Defence and Aerospace Pvt. Ltd—to pursue growth opportunities in the defence sector.

The same morning, The Economic Times carried a story that M&M would purchase a majority stake in Pipavav Defence for roughly 3,000 crore, at 66 a share in a three-phase deal.

The story was a follow-up to a report in the same paper that M&M, the Hero Group and a French shipbuilder had started separate discussions with the founders of Pipavav Defence to purchase a 19% stake in the company that has facilities to build warships, submarines and liquified natural gas carriers.

Gandhi reached out to one more suitor, Larsen and Toubro Ltd (L&T), India’s largest engineering company. It wasn’t the first time he had done so. Almost five years ago, Gandhi had been in touch with L&T to sell Pipavav Defence, but the company had passed up on the offer.

“Some five years back, he was willing to sell at almost 32 per share," says an L&T official who requested not to be identified because he is not authorized to speak with the media. “But we had said no because we were already investing in our own greenfield facility in Kattupalli near Chennai. So even this time around, it didn’t make sense for us."

But the news articles became more frequent. And on 20 February, a report published in The Economic Times said the Munjal family, which had raised 1,800 crore by selling a 3.3% stake in Hero MotoCorp Ltd on 18 February, was likely to announce a takeover of Pipavav Defence.

On 25 February, this newspaper reported that Pipavav Defence may announce a deal as early as by the end of February. The Munjals of the Hero Group, and M&M, which has interests in the defence equipment business, were in the race to pick up a stake in Pipavav Defence, said the report, citing two people familiar with the development.

Except that Ambani pipped them all to the post.

On 4 March came the announcement that Reliance Infrastructure would spend 819 crore for an 18% stake in Pipavav Defence, at a price of 63 per share, a 17.6% discount to the prevailing share price at the time, gaining management control.

Reliance Infrastructure, through its subsidiary Reliance Defence Systems, will, after the acquisition, make an open offer to acquire an additional 26% stake in the company from public shareholders at 66 per share, a company statement said. As per the deal, Reliance Infrastructure will also acquire from Pipavav Defence promoters additional shares in the company, at 63 per share, to take its shareholding to not less than 25.1% after taking into account the stock bought in the open offer.

“Both the Munjals and Mahindras were keen on doing extensive due diligence before inking the deal," said the person quoted in the first instance. “But the Pipavav promoters were not ready to wait. Then the deal was purely driven by the decision of promoters who were in the race. Ambani was willing to take a quick decision. And he was quick enough to sign the deal."

And not just that, Ambani also added a sweetener. Immediate cash on the table for buying the founders’ stake and an open offer to follow.

Another person familiar with the development, requesting anonymity, said Reliance Group offered to pay 10% more than its rivals for the stake to Pipavav Defence shareholders.

Bhavesh Gandhi, co-founder at Pipavav Defence, declined comment for this story.

The Reliance Group did not respond to an email seeking comment.

A fourth person close to the development said that the Reliance Group moved fast in the deal compared to other suitors. Pipavav Defence was a badly run company which is why it was up for sale and Reliance Group did do its due diligence before inking the deal, added this person who asked not to be identified. He added that the terms of the agreement between the two companies have several conditions and that if these are not met, the deal could fall through.

Still, why was Reliance Group in such a hurry?

It was the near-term opportunity on offer. On 17 February, the cabinet committee on security approved plans to build six nuclear-powered submarines and seven stealth warships at a cost of about 1 trillion.

The Indian Navy is currently assessing the capability of ABG Shipyard Ltd, L&T and Pipavav Defence to build six modern conventional submarines through technology transfer from a foreign collaborator in a deal estimated at 50,000 crore. The last time such an order came by was in 2002.

The Reliance Group saw an opportunity to “make a very quick entry" into the business by buying Pipavav Defence, said the second person quoted above. “Amongst manufacturing defence equipment like guns or tanks or jets, naval is the quickest thing to do. Because it doesn’t need much, you can yourself design from the open market and tech is minimal. All it needs is execution."

And then, there is the sunrise sector story. India’s defence spending is expected to hit $620 billion between 2014 and 2022, with half of it going into capital expenditure, potentially turning a leading buyer of expensive arms into an arms supplier to rich nations.

Driven by both domestic and external demand, the annual opportunity for Indian companies—both public and private sector—is expected to reach $41 billion by fiscal year 2022 and $168 billion between fiscal years 2014-2022, according to a report by industry lobby Federation of Indian Chambers of Commerce and Industry and financial services firm Centrum Capital Ltd.

And in August, the foreign direct investment (FDI) limit in defence manufacturing was raised from 26% to a composite cap of 49% (FDI and foreign institutional investment) through the Foreign Investment Promotion Board route with full Indian management and control.

The report said the government’s Make in India initiative to encourage manufacturing was expected to help Indian defence firms.

On his part, Gandhi says that the task of taking Pipavav Defence to the next level had become tiresome.

“Building a greenfield facility is a big challenge. It is so complex and time consuming," he said in an interview on 4 March. “You need to take too many risks in creating a new facility. It is a task by itself. After building a greenfield facility, fatigue sets in while you want to take that to the next level."

But why Reliance Group? Gandhi says he wanted a partner who believed in Prime Minister Narendra Modi’s Make in India programme.

“I need somebody who is ready to bite the bullet of the Make in India concept," he says. “Reliance Infrastructure is sharing my vision. And they had a deep commitment and decisive attitude for the defence segment."

On 10 March, The Financial Express reported that the Modi government had shortlisted L&T and Pipavav Defence for award of a 60,000 crore contract to build six conventional submarines under its Project 75i.

The tender would be a “buy and make (in India)" one, which implies tie-ups for technology with foreign collaborators with substantial manufacturing in India, the paper reported, citing sources.

Mint could not immediately verify this.

Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.

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