Street sees CG Power's acquisition by Tube Investments as a win-win deal

A stronger partner will help business growth; further gains for the stock hinges on pricing and deal completion

The news of Tube Investments of India (TII) acquiring a controlling stake in CG Power and Industrial Solutions (CG Power) has boosted investor sentiment. CG Power has gained 27 per cent while TII shares are up 15.8 per cent since the announcement as the Street sees it as a win-win deal for the two companies. CG Power gets a stronger parent, while TII gets a larger business and growth opportunity, albeit with its share of risk.

CG Power, which provides power and industrial system related services in India and abroad, has struggled largely with stress in its European operations.

While the company restructured and divested some European business, it was not able to find suitable buyers for its Belgium operations and a few other assets. In fact, FY20 saw Belgium subsidiaries being referred to the country's bankruptcy court. The financial stress, coupled with corporate governance issues and alleged financial fraud in India business had led to a 90 per cent erosion in its market cap since January’2018 highs.

The Murugappa Group company, TII now planning to back CG Power by acquiring majority stake is a positive development to revive street confidence, says Ambreesh Baliga an independent market expert.

TII will be investing Rs 700 crore for a controlling stake – Rs 550 crore to acquire 51 per cent stake and Rs 150 crore towards issue of warrants to be converted into equity shares in 18 months; taking total stake to about 57 per cent. TII said that CG Power is undergoing financial stress and the lenders have initiated the process for resolution of stress under the Stressed Asset Directions.

Harshit Kapadia at Elara Capital says, prospects of CG Power's India and even Indonesia business remain decent. The company has been doing well in transmission and distribution space as well as industrial motors, generators and other segments, and it is only that thermal power transformers is lagging, looking at limited new thermal capacity additions. Even Indonesia operations are seeing decent order flows. Thus, the acquisition will be positive for engineering segment of TII, which is less leveraged and can debt for the acquisition.

TII, which reported sales of Rs 4,750 crore in FY20, gets a business which is slightly larger than its own given CG Power's FY20 revenue of Rs 5,158 crore. So, the pay-back time will depend on how quickly it turns around CG Power.

Baliga adds that Murugappa group is very conservative and must have done due diligence before making a binding bid. Kapadia, however, says he is watchful on TII handling European stressed asset issues and other prerequisite clearances before the deal completion. Further, though TII may have discussed debt obligations with lenders before arriving at an offer price, how it will deal with other creditors needs be seen. Moreover, it may have to up the offer or face competitive bids, if lenders to CG Power have their way. 

Investors need to be watchful on progress on deal completion and its successful completion can lead to re-rating and some more gains for CG Power stock, says Deepak Jasani, Head Retail Research, HDFC Securities.

TII, too, has said that the investment and allotment of equity shares and warrants are subject to it being declared as successful bidder under the Swiss Challenge Process under stressed asset directions and satisfactory fulfilment of Conditions Precedents contained in the agreement.

Overall, Street sentiments are likely to remain firm, but further gains hinge on the deal's completion.