After months of lull, the consortium of Schneider Electric of France and Singapore’s Temasek Holdings has resumed negotiations to acquire Larsen & Toubro’s electrical and automation business. An announcement is imminent and may be made by this month end, said people aware of the developments.
L&T Electrical & Automation is expected to be valued between Rs 13,000 crore to Rs 15,000 crore, which is lower than the earlier estimate. This has been a sensitive topic for the L&T top brass led by group chairman AM Naik who has spearheaded the negotiations.
Schneider is likely to discuss the matter at its upcoming board meeting. “The deal was expected to be completed last quarter but got stuck over valuation differences. From the previous expected price of Rs 15,000 crore to Rs 17,000 crore, the financial specs have already been revised by 10%,” said an official.
ET first reported in its edition dated November 8 that Schneider-Temasek combined had emerged as the frontrunners to buy the business.
Bank of America Merrill Lynch and Citi are advising Schneider-Temasek, while Arpwood is working with L&T.
Schneider Electric, with a revenue of ¤27.4 billion in 2017, is expanding its presence in the Indian market and is aggressively pursuing the transaction, which was revived after new suitors such as Siemens showed interest. Previously, ABB, Hitachi and Honeywell had evaluated the business. Siemens and Eaton have been the other serious contenders. Temasek, the Singapore state investment firm with a net portfolio value of $197 billion, is expected to have a minority stakeholding, said two people. The transaction is likely to be a leveraged buyout, wherein financing will be raised on the balance sheet of the target company. Spokespersons of Schneider, Temasek and L&T declined to comment on the matter, calling it market speculation. L&T has already identified the electrical &automation unit as non-core to divest it.
L&T Electrical & Automation manufactures and sells switchgear components, custom-built switchboards, electronic energy meters/protection (relay) systems and control & automation products.
The division has 11 manufacturing facilities in India, Asia and Europe. It reported a revenue of Rs 5,367 crore in FY17 with a 15.1% operating profit. The business is expected to clock Rs 860 crore in operating profit in the current financial year.
The proposed sale is aimed at pruning the engineering giant’s portfolios. Over the past year, the conglomerate — with a presence in technology, engineering, construction, manufacturing and financial services in over 30 countries with $17 billion in revenue — has sold several non-core assets.
This, along with the sale of the general insurance business, helped L&T to completely fund its investments in Nabha Power and Hyderabad Metro in FY17. Most analysts expect investments to be limited to development businesses and consolidated capex to moderate to Rs 3,000 crore annually compared with Rs 8,000 crore over FY12-16.
The E&A segment faced a difficult business environment in 2016-17 due to a prolonged period of low off-take from the industrial sector even though agricultural sales were strong due to a good monsoon in 2016. The business recorded a marginal drop in gross revenue. Revenue from international operations constituted 29.4% of the total compared with 31.4% in the previous year.
Its operating profit improved to 15.1%, or Rs 702 crore in 2016-17, while the operating profit margin gained 260 basis points due to a favourable product mix and better operational efficiencies. The light voltage switchgear market is expected to grow by 8-10% and may reach `7,600 crore in 2020.
The government has introduced various measures to boost the economy, including Make in India, smart cities and smart grid initiatives, increased infrastructure spending, rural electrificationNSE -0.62 %, turnaround of state electricity distribution companies, improved farm productivity and increased focus on renewable energy. While these steps hold promise, they will take time to get off the ground and start generating business.
“Electrical and automation segment on a like-to-like basis, revenue for this segment grew by 3% this quarter. This growth has mainly accrued from products business,” said Rohit Kumar Rai of Deal money. “This is a cash-generating business that is ROE positive but very limited growth. For players like Schneider, this makes a consolidation exercise,” said a CEO from a rival switchgear company on the condition of anonymity.
Schneider Electric, which specialises in energy management and automation solutions and serves global industrial conglomerates, has been aggressively expanding here. Since 2010, it has made over half a dozen acquisitions including Luminous, Digilink, Uniflair, Areva T&D and Invensys.
Source: Economic Times