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The Great Battle For....

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Fighting Fit? Prakash Kapoor, managing director of BSL, needs to outbid ABG’s counter offer (Pic by Satheesh Nair) Prakash C. Kapoor and Vijay Kumar, both 63 and Managing Directors of Bharati Shipyard (BSL), share a lot more than the board room. Besides an identical shareholding of 20 per cent each, matching qualification from IIT Kharagpur and an apprenticeship at Mumbai’s Mazgaon Dock, they shared the same dream in ship building when they started designing and constructing small vessels at the non-descript Ratnagiri and Ghodbunder yards in 1976. On 23 June came the test of their instinct when their rival company, the Rs 1,400-crore ABG Shipyard made an unsolicited counter offer for the Rs 963-crore Great Offshore Services. Promoter Vijay Sheth had pledged 14.9 per cent of his total stake of 15.8 per cent with BSL for Rs 200 crore in 2008 when it was worth only Rs 130 crore. “Having taken a small loan from SBI and started in a modest way, we built relationships in business all along,” says Kapoor. “When it came to Great Offshore, with which we have been associated for 16 long years, we knew we had to do a lot more. We had no knowledge of Vijay Sheth’s troubles.” But when BSL made the mandatory open offer to the public to acquire 20 per cent more at Rs 344 per share, ABG made a counter-offer at Rs 375 per share. Kapoor and Kumar have to now decide whether raising the price of their offer beyond ABG’s would affect the viability of the acquisition or should they let ABG walk away with Great Offshore. Analysts say BSL may have erred in offering to buy shares from the public at Rs 344 per share when the last tranche of 4.58 per cent of the Sheth family stake was bought at Rs 403 per share for Rs 68 crore. Sebi rules provide that the open offer has to be made at the highest price at which any stock has been bought in a block deal. But elevating the offer to Rs 404 (or beyond if the bidding war intensifies) may raise the cost of acquisition from Rs 269 crore to Rs 300 crore. But for BSL, a lot more is at stake than what meets the eye. The Sheth deal had already impacted BSL’s profitability (net profit margin down 320 bps to 13.4 per cent 2008-09). “Clarity on Great Offshore was extremely crucial since the latter accounts for 20 per cent of BSL’s order book including rigs worth Rs 760 crore and vessels worth Rs 270 crore,” says Pritesh Chedda of Emkay Global, a broking firm. Seemingly, BSL’s Kapoor and Kumar need Great Offshore more than anyone else. BSL has reserves of approximately Rs 670 crore and liabilities of over Rs 700 crore. It has revised investments in Dabhol and Mangalore yards to another year while keeping the greenfield yard in West Bengal on hold. Despite a fund infusion through preference warrants of Rs 21 crore, liquidity concerns remain as Foreign Currency Convertible Bond (FCCB) repayments are nearing. On the other hand, despite a debt of Rs 1,900 crore and debt equity ratio of 1.5 times, Great Offshore is a great buy: it has a surplus of Rs 780 crore and had a net profit of Rs 211 crore last fiscal, and more than 60 drilling assets to boot. Not Giving Up: Buoyed by the fact that it has a larger balance sheet than BSL, ABG might up its offer. (Bloomberg) “For BSL, adding Rs 250 crore to the existing Rs 700-crore debt, plus the FCCB liability would not be prudent. Great Offshore also needs investment in asset replacement and debt servicing,” says Chedda, while Kapoor says he has internal accruals to generate Rs 250-300 crore to complete the acquisition. To Kapoor’s discomfort, Dhananjay Datar, CFO of ABG Shipyard, says his company has just opened up a ‘basket of opportunity’ for shareholders. Dismissing the argument that ABG, the leading shipyard in India with an order book position of Rs 11,500 crore has no insight into the strengths of Great Offshore, Datar says he sees it as an opportunity to expand business. “Let’s see his (Kapoor’s) next move. We are prepared,” says Datar, who claims to have tied up further funds for the kill. Kapoor needs to worry as ABG Shipyard has a bigger balance sheet and larger cash flows. ABG has built over 104 vessels and has 0.34 per cent of the world order book and ranks 66th among the world shipyards. It is setting up a greenfield project at Dahej after recently acquiring Vipul Shipyard and Western India Shipyard. Comparatively speaking, its bulk carrier order book is full and there have been no cancellations. It’s now more of a question of wooing the large shareholder blocks of financial institutions with 28.94 per cent, non-institutions with 13.79 per cent and individuals with 29 per cent. Whoever gets control of the company, the bidding war will impact the prospects of Great Offshore. The question is: what makes it a company worth fighting for? At a time when global crude prices are tightening and oil exploration is going to see a resurgence, Great Offshore — the largest domestic player in drilling, logistics support, port and terminal support and marine construction — is a goldmine. The company has the majority of the long-term upstream exploration contracts from ONGC, leading to assured cash flows. “It is a great opportunity in offshore business on a platter — all you have to pay is about Rs 300 crore for assets worth over thousands of crores,” says Emkay Global’s Chedda. Syed Sagheer, an analyst with PINC Consulting, feels marine construction contracts worth Rs 230 crore, mostly from ONGC, will diversify its revenues. “This would be forward integration where BSL would build, repair and maintain its assets,” says Kapoor. “It has an ageing fleet that needs to be replaced while we consolidate the operations. In the present downturn, we can use cheaper inputs to build ships for Great Offshore. When the market is good, we can build for other clients at a higher price.” Analyst Pritesh Chedda, however, is unimpressed with the BSL management and its current bid. “All that it is looking for is a captive customer, insulating it to an extent in the present downturn in a shipping cycle that may last many years,” he says. He says BSL has not bagged a single order in the past one and a half years, much in line with the global industry. Kapoor, however, feels the ‘open offer war’ will not go beyond another round. Analysts say ABG is well aware of its disadvantage — close to 20 per cent stake is with BSL promoters who need just another 6 per cent to block any special resolutions on the board. But if ABG bags the 32.12 per cent it has sought from the public, it will be a totally different story. (Businessworld Issue Dated 30 June-06 July 2009)