Reliance Infrastructure (R-Infra), the infrastructure arm of the Anil Ambani-led Reliance Group, announced on Wednesday that it was acquiring an initial 18% stake in Pipavav Defence and Offshore Engineering from the promoters led by the Nikhil Gandhi family at Rs 63 per share valuing the stake at Rs 819 crore. If completed, this will be the largest deal in the Indian defence sector.
R-Infra eventually seeks to acquire the company with an at least 25.10% stake, which could cost it as much as Rs 2,082 crore.
In a statement, R-Infra said it would follow up the initial 18% stake purchase with an open offer to acquire another 26% from shareholders at a value of Rs 66 per share.
If the open offer fails or is only partially subscribed, R-Infra will acquire additional shares of the company from the promoters so as to ensure that its holding in Pipavav is at least 25.1%.
Pipavav, which is struggling with a massive net debt burden of Rs 5,481 crore in FY14 and has a Rs 12,000 crore-loan recast proposal pending with lenders, has been in the news as a prime acquisition target for the last few weeks, though R-Infra’s name was never mentioned as a potential acquirer.
Sources in the banks that have lent to Pipavav told FE, on condition of anonymity, that Wednesday’s announcement was the initial stage of the deal and that they would discuss the matter at the next corporate debt restructuring cell meeting. The approval of the lenders will be key for the two companies to successfully complete the deal.
Post completion of the transaction, Ambani will be the chairman of Pipavav and the existing promoters of the company will continue as minority shareholders with two non-executive board seats.
Automaker Mahindra & Mahindra and Hero MotoCorp were reported to be interested in acquiring Pipavav, which in Q3 FY15 reported a loss of Rs 70.2 crore on revenues of Rs 252 crore. In FY14, the firm had a turnover of Rs 2,534 crore in FY14 and a net profit of Rs 2.72 crore.
The valuation of Rs 63 per share fixed to buy shares from Pipavav’s promoters is far below the company’s closing share price on Wednesday, which stood at Rs76.50 per share. At a marginally higher value of Rs66 per share, R-Infra’s open offer to Pipavav’s shareholders is unlikey to attract much interest.
“This is an unique opportunity for the Reliance Group to participate in Prime Minister Narendra Modi’s ‘Make in India’ programme for the high growth defence sector,”Anil Ambani, Reliance Group’s chairman, said in a statement.
Reliance Group’s statement said that Pipavav stood to benefit from potential defence sector orders to the tune of Rs1,20,000 crore over the next five years.
The Reliance Group did not specify how it intends to fund the deal and whether it will be raising any equity for this purpose. R-Infra had a turnover of Rs 19,034 crore in FY14 and a net profit of Rs 1,914 crore. Its net debt in the last fiscal stood at Rs 19,486 crore and the company has cash and cash equivalents to the tune of Rs 4,802 crore.
An analyst, who tracks utilities for a Mumbai-based brokerage, said that funding the first phase of the deal will not be a challenge for the company and it has “enough balance sheet has strength” for the same.
Pipavav’s chairman Nikhil Gandhi told a television channel on Wednesday evening that the arrival of the Reliance Group as incumbent investors will lend “more strength to the company”, which is in talks with lenders to restructure debt. It will take around three-and-a-half months to secure regulatory approvals for the deal, Gandhi said.