Will Suzlon benefit from the sale of Senvion? For Suzlon Energy, its acquisition of Germanys REpower (later renamed Senvion) has been jinxed from start. But the more immediate question is, will its selling remove that jinx. Let’s take a look at the entire deal from the start. REpower, a much bigger company than Suzlon, was bought by the latter for Euro 1.5 billion in 2007. The acquisition was financed largely by debt. To make matters worse, the European crisis led to a slowdown in demand. Adding to the problem was removal of subsidy benefit on wind power, not only in India but also in the US, the biggest player in the wind power global market. This impacted Suzlon badly, as it did others, who then resorted to predatory pricing. Suzlon’s effort to leverage the balance sheet of REpower was also disallowed. Neither could Suzlon sell the German unit nor could it get it listed at the valuation it wanted. Suzlon had clearly bitten off more than it could chew. To its credit, Suzlon used the time and slowdown to tighten its belt. It rationalized its work force, renamed the company to Senvion, improved its product quality, moved up the value chain, added geographies, changed the revenue mix as well as payment terms for its products. The result was visible in the performance of the German unit. Since its acquisition, revenue has increased fourfold while its profitability has increased eight times. Then why has Suzlon sold this bigger and more profitable unit for Euro 1 billion, a discount to its acquisition price of Euro 1.5 billion? It makes little business sense. The only reasonable explanation is that the company is being compelled to do so by its lenders who are making this as a condition for restructuring. The acquirer, Centrebridge Partners, is a private equity fund which specializes in distressed asset purchases. Unfortunately for Suzlon, Senvion is being sold at distressed valuation compared to its acquisition price and despite the stronger fundamentals of the company. What will Suzlon be left with post Senvion? A Business Standard report points out that the sale will shrink the company’s size by 65% but will help to keep its head above water by paying off some lenders. Thankfully for Suzlon, the business environment for renewable energy is improving in India, and the opportunity here seems bigger than that overseas. Wind power companies like Suzlon were affected by the previous government’s decision of removing accelerated depreciation policy. Wind power companies were selling their units as a tax saving financial product because of this policy which not only gave the companies tax benefit but also high IRRs (internal rate of return) of over 17%. The policy, which was withdrawn in 2012, has been notified in September 2014. Further, generation-based incentives (GBI) which was withdrawn in March 2012 has been reintroduced which gives the generator an incentive of Rs 0.50 per unit with its ceiling increased from Rs 0.62 core to Rs 1 core. Removal of these two incentives reduced installation of wind power in India from 3,179 MW in 2012 to 1,721 MW in 2013. As per a Suzlon presentation, installation is expected to increase to 3,600 MW in FY16 and 4,000 MW in FY17. Wind power companies will also get a boost from the fact that renewable energy and wind turbine generators are qualified as a CSR (Corporate Social Responsibility) activity. Under the new companies act, companies have to spend 2% of their profit on CSR activity. Fast tracking of Green corridor by the Modi government will also speed up growth for the company. Though the Senvion sale at depressed prices is bad for the company in the short term, if it helps company clear its corporate debt restructuring (CDR) proposal, it would be helpful for the company in the long run. Moreover, with the opportunity that is available, Suzlon would prefer to be in a slimmer shape to capture it. So was Senvion the jinx that held Suzlon back? The jury is still out on that one.
Posted on: Thu, 22 Jan 2015 11:48:38 +0000
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