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February 26, 2015

Why private shipyards make for good acquisitions

Media reports in recent days have claimed that Pipavav Defence and Offshore Engineering Co. Ltd, the first Indian company outside of state control to get a licence to build warships for the Indian Navy, and ABG Shipyard Ltd are in play. Mint learns that a deal involving Pipavav may be announced as early as the end of this week. And ABG’s chief financial officer and executive director Dhananjay Datar confirmed that the company is open to selling a stake to a strategic investor and that this move is being led by its lenders. But why are private shipyards suddenly in the news? And why does everyone want a piece of them? Cash-rich companies looking to expand their defence divisions are looking to buy out firms that have already put the infrastructure in place, say analysts. Their interest has been stoked by the National Democratic Alliance’s “Make in India” campaign and Prime Minister Narendra Modi and defence minister Manohar Parrikar’s statements about the manufacture of defence equipment being at the core of this initiative. “The government is said to be planning a $250 billion naval spend in the next decade. The Prime Minister has been making the right noises. Many see this as an opportunity,” said the promoter of a private yard on India’s western coast. The person spoke on condition of anonymity. It helps that both Pipavav and ABG have debt woes. Pipavav had Rs.4,962.06 crore debt on its books as of September 2014 and ABG Rs.6,128 crore. “The JLF (joint lenders’ forum) has asked Pipavav Defence to bring in more equity for the restructuring plan to go through, since the company’s creditworthiness had gone down. So a strategic partner coming in is good news. Once the investor buys a majority share in the company, lenders can think of extending further loans,” said a senior banker at a state-owned bank that had loaned money to Pipavav Defence who asked that neither he nor his bank be identified. “We have asked our lenders what deal they can offer in terms of money involved and the stake to be sold. We have not committed on anything,” Datar of ABG said. Bhavesh Gandhi, founder, executive vice-chairman and managing director of Pipavav Defence, did not reply to messages seeking comment. Two people familiar with the development who asked not to identified said that the Munjals of the Hero Group, and the Mahindra Group, which has interests in the defence equipment business, are in the race to pick up a 51% stake in Pipavav. Neither wanted to be identified. A spokesperson for the Hero Group declined comment. A spokesperson for the Mahindra Group too declined comment. On 18 February, the Hero Group, which controls India’s largest scooter and motorcycle maker, sold a 3.5% stake in its flagship Hero MotoCorp Ltd to raise funds to diversify into other business areas. The group sold seven million shares of Hero MotoCorp for as much as $306 million. The sale proceeds would be utilized to fund new growth opportunities, the group said in a statement last Wednesday. “The Prime Minister’s ‘Make in India’ platform has opened up new vistas, some in very high growth areas, and the Hero Group—with its experience, scale of operations and brand equity—is uniquely placed to leverage these emerging opportunities,” Hero said in a statement. The deal size for the Pipavav transaction would be in excess of Rs.3,300 crore, one of the two people said. He added that the Gandhi family that controls the company would retain a significant interest in it after the deal. Last week, Prime Minister Modi said at the Aero India show in Bengaluru that the country imports nearly 60% of its defence equipment, spending tens of billions of dollars on such purchases. Even a 20-25% reduction in imports could create an additional 100,000-120,000 highly skilled jobs in India, he added. Asking Indian defence companies to manufacture locally, Modi said that if India could raise the percentage of domestic procurement from 40% currently to 70% in the next five years, the output of the Indian defence industry would double. That puts Pipavav, ABG, and L&T Shipbuilding Ltd in a sweet spot. All have licences to build warships. Newcomers seeking to tap this opportunity will first have to build a yard from scratch and then apply to the government for a licence to build warships. “All this will take at least 10 years if not more,” the shipyard promoter quoted earlier added. It is far easier to buy into the opportunity, he said. 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 Rs.1 trillion. The Indian Navy is currently assessing the capability of all the three yards to build six modern conventional submarines through technology transfer from a foreign collaborator in a deal estimated at Rs.50,000 crore. For yards struggling to raise working capital to execute existing contracts, this could be an opportune situation, said the chief executive of another shipyard on the western coast, adding that existing promoters may no longer have the ability to bring in more equity. “Suddenly our yard has become very valuable. There is a huge potential for defence orders; but money has to be put in to achieve that potential,” he said on condition of anonymity. Lenders with outstanding loans to these troubled yards—some of whom are in the process of restructuring their debts—are keen on bringing in strategic investors to financially strengthen these firms. A second banker at another state-owned bank said promoters of Pipavav Defence cannot restructure its Rs.7,000 crore debt unless it gets some fresh equity. “They have to bring in a strategic partner soon,” said the banker, who didn’t want to be named. On Wednesday, The Economic Times reported that promoters of ABG Shipyard are in talks with domestic and foreign investors including the Mahindra Group to sell a strategic stake. Later in the day, the shipyard said no such negotiations were taking place with the Mahindra Group.

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Media reports in recent days have claimed that Pipavav Defence and Offshore Engineering Co. Ltd, the first Indian company outside of state control to get a licence to build warships for the Indian Navy, and ABG Shipyard Ltd are in play. Mint learns that a deal involving Pipavav may be announced as early as the end of this week. And ABG’s chief financial officer and executive director Dhananjay Datar confirmed that the company is open to selling a stake to a strategic investor and that this move is being led by its lenders. But why are private shipyards suddenly in the news? And why does everyone want a piece of them? Cash-rich companies looking to expand their defence divisions are looking to buy out firms that have already put the infrastructure in place, say analysts. 
Their interest has been stoked by the National Democratic Alliance’s “Make in India” campaign and Prime Minister Narendra Modi and defence minister Manohar Parrikar’s statements about the manufacture of defence equipment being at the core of this initiative. “The government is said to be planning a $250 billion naval spend in the next decade. The Prime Minister has been making the right noises. Many see this as an opportunity,” said the promoter of a private yard on India’s western coast. The person spoke on condition of anonymity. It helps that both Pipavav and ABG have debt woes. Pipavav had Rs.4,962.06 crore debt on its books as of September 2014 and ABG Rs.6,128 crore. 
“The JLF (joint lenders’ forum) has asked Pipavav Defence to bring in more equity for the restructuring plan to go through, since the company’s creditworthiness had gone down. So a strategic partner coming in is good news. Once the investor buys a majority share in the company, lenders can think of extending further loans,” said a senior banker at a state-owned bank that had loaned money to Pipavav Defence who asked that neither he nor his bank be identified. “We have asked our lenders what deal they can offer in terms of money involved and the stake to be sold. 
We have not committed on anything,” Datar of ABG said. Bhavesh Gandhi, founder, executive vice-chairman and managing director of Pipavav Defence, did not reply to messages seeking comment. Two people familiar with the development who asked not to identified said that the Munjals of the Hero Group, and the Mahindra Group, which has interests in the defence equipment business, are in the race to pick up a 51% stake in Pipavav. Neither wanted to be identified. A spokesperson for the Hero Group declined comment. A spokesperson for the Mahindra Group too declined comment. On 18 February, the Hero Group, which controls India’s largest scooter and motorcycle maker, sold a 3.5% stake in its flagship Hero MotoCorp Ltd to raise funds to diversify into other business areas.
 The group sold seven million shares of Hero MotoCorp for as much as $306 million. The sale proceeds would be utilized to fund new growth opportunities, the group said in a statement last Wednesday. “The Prime Minister’s ‘Make in India’ platform has opened up new vistas, some in very high growth areas, and the Hero Group—with its experience, scale of operations and brand equity—is uniquely placed to leverage these emerging opportunities,” Hero said in a statement. The deal size for the Pipavav transaction would be in excess of Rs.3,300 crore, one of the two people said. 
He added that the Gandhi family that controls the company would retain a significant interest in it after the deal. Last week, Prime Minister Modi said at the Aero India show in Bengaluru that the country imports nearly 60% of its defence equipment, spending tens of billions of dollars on such purchases. Even a 20-25% reduction in imports could create an additional 100,000-120,000 highly skilled jobs in India, he added. Asking Indian defence companies to manufacture locally, Modi said that if India could raise the percentage of domestic procurement from 40% currently to 70% in the next five years, the output of the Indian defence industry would double. 
That puts Pipavav, ABG, and L&T Shipbuilding Ltd in a sweet spot. All have licences to build warships. Newcomers seeking to tap this opportunity will first have to build a yard from scratch and then apply to the government for a licence to build warships. “All this will take at least 10 years if not more,” the shipyard promoter quoted earlier added. It is far easier to buy into the opportunity, he said. 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 Rs.1 trillion. 
The Indian Navy is currently assessing the capability of all the three yards to build six modern conventional submarines through technology transfer from a foreign collaborator in a deal estimated at Rs.50,000 crore. For yards struggling to raise working capital to execute existing contracts, this could be an opportune situation, said the chief executive of another shipyard on the western coast, adding that existing promoters may no longer have the ability to bring in more equity. “Suddenly our yard has become very valuable. There is a huge potential for defence orders; but money has to be put in to achieve that potential,” he said on condition of anonymity. 
Lenders with outstanding loans to these troubled yards—some of whom are in the process of restructuring their debts—are keen on bringing in strategic investors to financially strengthen these firms. A second banker at another state-owned bank said promoters of Pipavav Defence cannot restructure its Rs.7,000 crore debt unless it gets some fresh equity. “They have to bring in a strategic partner soon,” said the banker, who didn’t want to be named. On Wednesday, The Economic Times reported that promoters of ABG Shipyard are in talks with domestic and foreign investors including the Mahindra Group to sell a strategic stake. Later in the day, the shipyard said no such negotiations were taking place with the Mahindra Group

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1 comment:

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