Areva may queer Suzlon pitch for German firm

Suzlon's Rs 6,000 crore bid to acquire Germany's third largest wind turbine maker REpower could well turn into a bidding war, with the French government-owned nuclear energy group Areva widely expected to make a counter offer.

Suzlon had last week announced an offer of ¤126 a share against Areva's initial bid of ¤105 a share. The offer was supported by Martifer who holds 25 per cent stake in REpower.

Market participants say the upward movement of the RePower stock, following the Suzlon offer, indicates that the market is expecting both the parties to engage in a price war. The REpower stock surgued to ¤146

Areva, which has six weeks to file a revised offer, is not forthcoming on its future course of action, but says that the Repower management believes that Areva is the right partner.

An Areva spokesperson says in an emailed statement, "The Areva Group has launched a friendly public tender offer for Repower Systems AG on February 5. Areva notes the announcement by Suzlon regarding Repower Systems AG. Areva as the main shareholder, has been working with Repower and fully supports its strategy and its management, which stated clearly that it believes Areva is 'the right partner' for REpower." Areva holds 30 per cent stake in REpower.

A Suzlon spokesperson said that the company would file a prospectus outlining its plans for Repower with Bafin, the German market regulator, by the end of this week. Under German law until that happens, REpower's management cannot consider the Suzlon offer or recommend it to shareholders.

Merrill Lynch has downgraded the Suzlon stock on a likely bidding war. "We view this acquisition as positive in the medium term, given that it is RoE neutral for Suzlon by FY09E apart from the complimentary products,markets and option value in scaling up REpower with its competitiveness. However, we fear that this deal may end up in a bidding war as indicated by the stock price," the Merrill Lynch report says.

Analysts express concern over the pressure the REpower bid would put on Suzlon's balance sheet.

They point out that the company has already leveraged all its assets for a host of capex plans, including its 600 mega watt turbine plant in China and its Hansen acquisition. Last year, Suzlon acquired Hansen for euro 465 million.

"Although further leveraging would be possible, it would come at a significantly higher cost, which in turn will erode Suzlon's operating margins," said Mehul Mukati, an analyst at Emkay Securities.

Suzlon's operating margins have been lower than expected for the past two quarters of this financial year.

Suzlon and Martifer have proposed to launch a special purpose vehicle for the acquisition. Suzlon will acquire 75 per cent stake in the vehicle while Martifer will have 25 per cent stake. However, Suzlon will finance the entire offer through debt and and internal accruals.