Bharati Shipyard: The acquisition war ends

Great Offshore’s share price may fall once open offers by Bharati and ABG Shipyard close.

With ABG Shipyard selling its 8.3 per cent stake in Great Offshore, indicating its intention to pull out of the race to acquire the company, the ball is finally in Bharati Shipyard’s court. For Bharati, which already owns a 23.1 per cent stake in Great Offshore, open offer for another 20 per cent stake at Rs 590 per share will now cost it Rs 462 crore. Although the deal has turned out to be costly for Bharati due to the upward revisions in the open offer price, there will be long-term gains, as well as some immediate concerns.

While Bharati gets an exposure to a potential growth sector, the acquisition is also likely to be earnings accretive on a consolidated basis. Great Offshore reported a net profit of Rs 275 crore in 2008-09, and analysts expect the same to range in Rs 230-250 crore in 2009-10, as well as 2010-11. On the flip side, Bharati Shipyard’s total consolidated debt stood at Rs 1,003 crore at the end of March 2009, which has been hurting its bottom line. Adjusting for the cash and bank balances, its net debt-equity ratio stood at 1.1.

So, how the company raises funds to complete this deal will reflect on its debt-equity ratio going forward; choosing the equity route will surely mean a dilution in earnings. Meanwhile, despite the slowdown in the sector, particularly the oil and gas E&P segment, Bharati has a good order book of Rs 5,066 crore, which provides revenue visibility for the next two year. At the current market price of Rs 207.80, which translates into a PE of 3.7 times and 2.7 times its estimated earnings for 2009-10 and 2010-11, respectively, valuations look attractive.

For ABG Shipyard, it has gained about Rs 54 crore from the open-market sale of its holding of 30.78 lakh shares in Great Offshore. While it may have to carry on with its open offer to acquire 1.26 crore shares of Great Offshore at Rs 520, it is unlikely that the offer gets a good response given the higher open offer price of Bharati. In terms of business outlook, the company’s order book of Rs 12,500 crore provides revenue visibility for about next 24-30 months. However, on the valuation front, its stock is trading at 5 times and 3.7 times its 2009-10 and 2010-11 estimated earnings, respectively, which is relatively on the higher side.

While the shareholders of the Great Offshore have benefited immensely due to its rising stock price, analysts believe that taking into account a lower acceptance ratio of 26 per cent in the case of Bharati's open offer, its share price might correct further post the offer.