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Why Apollo Global is lending to stressed cos in India

By Dev Chatterjee
March 27, 2014 14:29 IST
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The year 2013 was a dream run for US-based Apollo Global Management. The fund made a killing when it sold its stake in chemical firm LyondellBasell – earning close to a billion dollars for its three founders and $10 billion for the fund. But as the US-based fund is cheering its success in the Unites States, its India business is still waiting at the tarmac for a take-off.  

Apollo Global has picked up stake in few Indian firms.Take for example, it’s been a year that Apollo put its 11 per cent stake in Dish TV on the block. As per a Reuters report dated March 13 last year, Apollo hired UBS to sell its stake in Dish TV as the fund saw an opportunity for an exit with good returns.  

The PE firm was expecting more than Rs 910 crore (Rs 91 billion) from its Dish TV stake it bought in 2009 for Rs 465 crore (Rs 4.65 billion). 

Apollo had acquired these shares at the rate of Rs 39.80 a share as compared to its current market value of Rs 49 a share. Apollo’s stake is valued at Rs 600 crore (Rs 6 billion)– based on Dish TV’s share price on Wednesday.  

But bankers say the fund was unable to get a buyer as there is low liquidity in Dish TV stock and no one was interested in a minority stake in the direct-to-home company unless Zee group owners back the deal.  “Besides, the fourth generation based telecom services are set to change the way Indians watch TV which can be a game changer and hence no one wants to take a risk now,” says a banker.  

But Dish TV is not the only investment the US-based private equity made in India. Apollo's private equity arm, which manages $160 billion of assets under management globally, invested in Mumbai-based Welspun Corp’s equity in 2011 and is now turning into a lender by giving loans to Avantha and Jyoti Structures in the last few months.

An email sent to Apollo Global's India Head Mintoo Bhandari did not elicit any response.

Apollo's rivals KKR and Blackstone, meanwhile increased their exposure in India and have invested $2.1 billion and $1.6 billion respectively since they set up shop here.

Apollo's second investment in India also did not go as per its plan.

The fund, which invested Rs 2,250 crore (Rs 22.50 billion) in Welspun in 2011,  paid Rs 1,305 crore (Rs 13.05 billion) to buy close to 20 per cent in Welspun Corp  through fully and compulsorily convertible debentures worth Rs 788 crore (Rs 7.88 billion) and global depository receipts worth Rs 517 crore (Rs 5.17 billion). 

The investment did not trigger an open offer for an additional 20 per cent shares as the debentures, after being converted within 18 months at Rs 225 a share, represented 13.3 per cent equity capital of Welspun Corp. Apollo still holds this stake and has received similar stake in the demerged entity called Wels-pun Enterprises which will be listed soon.

But since the Welspun investment, the Indian economy slowed down considerably and orders dried up for the pipe making company in India. The value of Welspun’s shares fell substantially and today’s Apollo’s shares are worth Rs 242 crore ( Rs 2.42 billion) with Welspun stock trading at Rs 69 a share on Wednesday.

The good news, however, is that the worse is now behind Welspun.   Welspun officials say they have taken several steps to revive its businesses.

This includes exiting infrastructure projects, selling stake in Lieghton Welpsun Contractors India Pvt Ltd back to its Australian parent at a significant profit of Rs 150 crore ( Rs 1.50 billion) and abandoning unnecessary expansions.

It also bifurcated Welspun into two companies giving equivalent stake to Apollo in Welspun Enterprises – the company housing its steel, infrastructure, energy and oil and gas business.

“We have a reputation in the industry for not defaulting to a single rupee and that’s why today we enjoy a Rs 20,000 crore (Rs 200 billion) of banking facility,” says Akhil Jindal, CFO of Welspun group.  Apollo, meanwhile, is advising the company on how to embrace global practices so that it emerges stronger.

 Besides, like any other global private equity, Apollo is now changing its tracks in India. It has set up a joint venture with ICICI Venture and is investing in stressed assets. The joint venture called AION - aims to raise close to $600 million. The fund will be lending money to distressed Indian companies at an average rate of 17-18% per annum. 

With equity investment becoming very risky, the private equity firms are of the view that lending money at a very high rate makes perfect business sense and help them to repay investors back home who will be happy with 7-8 per cent of returns.

Lending to stressed companies is the new mantra of Apollo in India.

 

 

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Dev Chatterjee in Mumbai
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