Rediff.com« Back to articlePrint this article

REpower bidding: Suzlon high on energy

June 04, 2007 12:06 IST

Tulsi Tanti is not a deeply religious man. But he believes that there is 'some energy'  in us that helps us to deal with our problems. That, possibly, is  what helped the 49 year old chairman of Suzlon Energy fight an almost four-month long  battle for control of the Hamburg-based REpower.

It seemed like the bidding for REpower, valued at euro1.35 billion, would never end but in the end Tanti managed to convince rival shareholder Areva to cede voting rights for its 30.17 per cent stake. In return, the Rs 6,130-crore (Rs 61.3 billion) Suzlon will buy out Areva's stake in REpower, a year down the line, at a valuation to be decided on by an independent team.

Tanti has also managed to bag the voting rights of Martifer, the other big shareholder in REpower with a holding of  23.08 per cent; Suzlon will buy out the equity  later, though exactly when is not clear.

So, with its own stake of just under 8 per cent, that it acquired at euro150 per share, Suzlon now controls 60 per cent of the voting rights of REpower. And for this, all Tanti is putting on the table right now is around euro250 million -- the cost for for its 8 per cent stake and the amount to be paid to minority shareholders who might choose to give up their shares  in reponse to Suzlon's open offer.

At an enterprise value of euro1.35 billion, the deal has not come cheap, even if the payments need to be made over time. But, Suzlon becomes  a strong player in Europe, the single biggest market for wind energy  accounting for a share of  50 per cent. 

REpower's state-of-the-art technology will help Suzlon upgrade its facilities and together they should sell over 3,000MW of capacity in 2007, making  the combine the fourth largest in the world. And Tanti knows  that he could not have made it this far on its own before  2012-13, which might have been too late.

The presence in Europe apart, REpower gives Suzlon an entry  into the offshore  market (turbines installed in water), where REpower is in pole position having tested out its 5MW turbines at four test sites.

REpower has, however, been unable to scale up operations due to a shortage of gear boxes, rotor blades and bearings. That's where Suzlon comes in: it is setting up capacities for these components. Moreover, in March last year, Suzlon acquired the Belgium-based Hansen Transmissions NV, which makes gear boxes for units of up to 2mW.

Hansen is ramping up capacity from 3,600mW to around 9,300mW and  can supply parts  to REpower. Over time, it could  look at making bigger units of  5MW, now that it will have a captive buyer in REpower.

More parts should help REpower  scale up production from current levels of 600 MW,  just 60 per cent of its potential, to around 900MW. Moreover, as Arvind Mahajan, executive director, KPMG points out, the higher level of operations together with the lower cost of components should  help trim REpower's raw material costs which are high at 82 per cent of sales.

"Suzlon can help lower costs by supplying cheaper components and this can be brought down to around 62-63 per cent of sales," Mahajan explains. Once that happens, REpower's operating margins should see an uptick from the current  4 per cent.

Suzlon's also hoping to make its own operations more profitable -- its operating margins are 16 per cent -- once its components capacity comes on stream. Says Tanti, "As we scale up, our margins should be better. Also, we can  save on procurement costs since the combined buying volumes will be far larger, " Tanti sure  has a plan. Now he needs to make it work.

Strong Tailwinds

 

Shobhana Subramanian in Mumbai
Source: source image