Acquisition of Repower by SUzlon - Case Study

Sharad Agrawal, Ashish Shiwalkar, Nilesh Jajoo, Varun Bhutani (PGDIM 13, NITIE), K.V.S.S. Narayana Rao

Introduction

Announcement - India's Suzlon Energy completes REpower acquisition [1]

MUMBAI, June 2 (Reuters) - India's Suzlon Energy Ltd. said on Saturday it had completed the acquisition of German wind turbine maker REpower and controlled 87.1 percent along with France's Areva and Portugal's Martifer in the company.
On May 25, Suzlon had said it hoped to control 75 percent of REpower and become the world's fourth largest wind-tubrine maker, after rival Areva did not raise its bid for the German company.
Last week, Suzlon and Areva, which were locked in a battle over REpower, decided to jointly run the German firm, after both separately failed to get a majority stake in it.
Suzlon said in a statement it held 33.85 percent in REpower after acquiring 25.46 percent more during an extended offer period for REpower's shares that ended on May 25.
Areva is the second-largest shareholder in REpower with 30.15 percent, while Martifer, a unit of Portugal's top builder Mota Engil holds 23.08 percent.
Suzlon had offered 150 euros per REpower share, valuing the German firm at around 1.2 billion euros ($1.6 billion) while Areva, the world's biggest maker of nuclear power plants, did not raise its offer price from 140 euros per share.
While Areva has the option to sell its stake to Suzlon after one year, Martifer can sell its share within two years up to 265 million euros, also to Suzlon.

About Suzlon Energy Ltd. (BIDDER)[2]

Suzlon Energy , market leader in Asia and the world’s fifth largest wind turbine manufacturer in terms of market share, offers customers total wind power solutions including consultancy, R&D, manufacturing, operations & maintenance services. Not even on the list of the world’s Top 10 wind-turbine manufacturers as recently as 2002, Suzlon passed Siemens of Germany last year to become the fifth-largest producer by installed megawatts of capacity. It is surpassed only by the market leader, Vestas Wind Systems of Denmark, as well as General Electric, Enercon of Germany and Gamesa Tecnológica of Spain.

On the back of the globally increasing demand for wind energy and its competitive advantage of having control over its supply chain through backward integration Suzlon plans to further increase its global presence. Suzlon is India’s leading manufacturer of wind turbine generators and has successfully expanded into China, the United States, Belgium, Denmark, Australia and Germany. Last year, Suzlon acquired Hansen Transmissions in Belgium, a leading producer of gear-boxes. Suzlon plans to create 300 news jobs at Hansen during the following years.
Suzlon’s R&D centres are located in Germany, in the Netherlands and in India. The international business of Suzlon is managed by Suzlon Energy A/s out of Aarhus in Denmark, which in turn has country headquarters in Beijing, Chicago and Melbourne for China, United States and Australia respectively. The Group Management office of Suzlon is located in Amsterdam, the Netherlands. Suzlon’s quality systems have been certified by Det Norske Veritas (DNV), one of the leading global registrars of quality systems, as being in compliance with the requirements of ISO 9001:2000.

Suzlon’s Vision
o To be the technology leader in the wind industry
o To be among the top three wind energy companies in the world
o To be the most respected brand and preferred company for all stake holders
o To be the best team and best place to work
o To be the fastest growing and most profitable company in the sector
Key Strengths

o Vertically integrated global wind player offering comprehensive solutions covering R&D and manufacturing to EPC project delivery and operations & maintenance services
o Strategically structured global supply chain to serve high growth markets; leveraging low-cost economies for manufacturing and sourcing
o In-house manufacturing of critical components such as rotor blades, towers and control systems with control over the design and technology of gearboxes (Hansen) and generators (Elin)
o Strong track record in EPC delivery across the world; constructed some of the world’s largest wind farms with capacities ranging from 200 MW to over600 MW
o Strong balance sheet and the highest recurring end-year EBITDA margin in the wind industry (20%)
o Defined strategic focus

Strategic Focus

o Vertical Integration
o Focus on Key High Growth Markets
o Growth through M&A
o Cost Efficiency
o R&D and Innovation
o Focus on Customer Satisfaction

About Martifer Group

The Martifer Group[3] is the holding company of a portfolio of approximately 40 companies that are divided into five core business units: Construction, Retail & Warehousing, Energy Equipment, Bio fuels and Electricity Generation. With total sales of €148 million in 2005 and a workforce exceeding 1000, Martifer is one of the fastest growing companies in Europe. In order to fuel further growth, Martifer currently plans an IPO for the second quarter of 2007.

Since its establishment in 1990, Martifer Construções Metalomecânicas SA (Steel Construction) has had an average yearly growth of 30 per cent, making it the leading steel construction company in Iberia and one of the largest in Europe. The company has activities in Europe, South America and Africa. As the company expands internationally and diversifies its portfolio of businesses, its core focus remains on construction and energy production. With emphasis on both segments, Martifer continues to invest in regenerative energy sources, in particular wind energy. To this end, Martifer cooperates with the German REpower AG on a national level and holds a stake of 25.4% in the company. The group has an installed capacity of 140 towers per year.

About REpower[4] Systems (TARGET)

REpower is one of the leading players in the fast-growing worldwide wind energy sector, specializing in high output turbine technology particularly suitable for offshore turbines. The management of the company has forecasted revenues of EUR 450 million for 2006. Aside from being one of the leading players in its home market of Germany, REpower has established a strong presence in a number of key European markets and is pursuing promising development plans in China, India and the USA.

Rationale Behind the Acquisition

The partnership will create a combination poised for technological leadership in wind power solutions. Looking forward into the future the following benefits can be reaped from this strategic acquisition.

o REpower and Suzlon will together form the best team in the global wind energy industry
o The combination brings together strong R&D, excellent technology teams and access to European markets with a vertically integrated supply chain, global market reach, strong technology and manufacturing base and financial muscle
o The combination promises to be a technology powerhouse capable of delivering and sustaining high growth with high margins
o The REpower –Suzlon combination has the potential to become the world leader in wind power solutions
o The partnership will create the most reliable product with the best life cycle cost

Offer Price[5]

The minimum Offer Price to be offered to REPOWER Shareholders as minimum consideration for their REPOWER Shares is the higher of
• The weighted average domestic stock exchange price of the REPOWER Shares
during the three-month period prior to the announcement of the BIDDER’s intention to make this Offer on 9 February, and
• The highest price paid or agreed by BIDDER, a person acting in concert with
BIDDER or any of their subsidiaries for the acquisition of REPOWER Shares
during the six-month period prior to the publication of Offer Document.

The Three Month Average Price for the REPOWER Shares as determined by the BaFin
and communicated in its database for the minimum prices pursuant to the WpÜG under
the applicable announcement date 8 February 2007 amounts to EUR 89.07.

BIDDER has not acquired, or agreed to acquire, REPOWER Shares in the six-month period prior to the announcement of this Offer on 9 February 2007 and prior to the publication of Offer Document respectively. Pursuant to the Takeover Agreement SEDT, which is acting in concert with BIDDER, has the right to request at specific dates the sale and transfer of the REPOWER Shares held by MARTIFER and ENERGY SYSTEMS and the shares in ENERGY SYSTEMS respectively (for details see section 3.2 of this Offer Document). In such case SEDT would be obliged to pay as purchase price for each REPOWER Share a consideration amounting to the Offer Price. On 9 February 2007 SEDT has moreover purchased 20,493 REPOWER Shares at a purchase price of EUR 115.41 for each REPOWER Share. The 20,493 Shares have been assigned to SEDT on 13 February 2007. Beyond this, neither any person acting in concert with BIDDER nor any of their subsidiaries have acquired, or agreed to acquire, REPOWER Shares during the six-month period prior to the 9 February 2007 or prior to the publication of Offer Document respectively.
The Offer Price of EUR 126.00 per REPOWER Share therefore fulfils the minimum pricing requirements

Adequacy of the Offer Price
For the purpose of determining the Offer Price, BIDDER has firstly looked at the development of the stock exchange price of REPOWER Share. It is a common practice to
determine the consideration for shares in listed companies on the basis of the stock exchange price. Several professional stock analysts evaluate REPOWER. The REPOWER Shares are traded regularly and to a sufficient extent whereby the free float amounts to 44 %. Therefore, the general conditions of the stock exchange trading in REPOWER Shares should have enabled an effective pricing. Given the fact that also the legislator attaches significant importance to the valuation of target companies on the basis of stock exchange prices, BIDDER considers the application of this method of valuation as being appropriate.

The Offer Price offers the following premiums compared to the historic stock exchange
prices:
• EUR 13.40, i.e. 11.90 %, compared to the closing price for the REPOWER Shares on the electronic trading system of the Frankfurt Stock Exchange (XETRA) on the day preceding the announcement of this Offer of EUR 112.60 (source: Bloomberg), whereby BIDDER assumes that this stock exchange price had already been influenced by the Areva Offer;
• EUR 36.93, i.e. 41.46 %, compared to the Three Month Average Price prior to the announcement of this Offer of EUR 89.07 which is to be regarded as minimum offer price for this Offer (source: www.bafin.de), whereby BIDDER assumes that also this stock exchange price has already been influenced by the Areva Offer;
• EUR 36.14, i.e. 40.22 %, compared to the closing price for the REPOWER Shares on the electronic trading system of the Frankfurt Stock Exchange (XETRA) on the day preceding the announcement of the Areva Offer of EUR 89.86
• EUR 54.53, i.e. 76.30 %, compared to the Three Month Average Price prior to the announcement of the Areva Offer of EUR 71.47 which is to be regarded as minimum offer price for the Areva Offer
• EUR 63.02, i.e. 100.06 %, compared to the average closing prices for the REPOWER Shares on the electronic trading system of the Frankfurt Stock Exchange (XETRA) during the sixth-month period prior to the announcement of the Areva Offer of EUR 62.98
The Offer Price is higher than any historic stock exchange price for the REPOWER Shares prior to the announcement of this Offer.
The foregoing comparison with historic stock exchange prices reveals that the Offer Price considerably exceeds the market value attached to the REPOWER Shares prior to the announcement of BIDDER’s intention to make a takeover offer. When determining the Offer Price BIDDER has also taken into account the consideration of EUR 105.00 offered in the Areva Offer. The management board and the supervisory board of REPOWER have reviewed this consideration of EUR 105.00 in their reasoned statements in respect of the Areva Offer pursuant to sec. 27 WpÜG on the basis of their analyses and of a fairness opinion and have come to the conclusion that already this price is appropriate from a financial point of view. Compared to these considerations, the Offer Price of EUR 126.00 offers a premium of EUR 21.00, i.e. 20 %. As the Areva Offer provides for a basis of comparison and the reasoned statements include considerations regarding the evaluation by the management board, the supervisory board and their financial advisors who had access to company’s internal information relevant for evaluation, BIDDER regards taking these circumstances into account as being appropriate. Therefore, BIDDER considers the Offer Price as being appropriate and very attractive for the REPOWER Shareholders.

Financing of the Offer

BIDDER does currently not hold any REPOWER Shares. Therefore, BIDDER expects to acquire in the context of this Offer at the most 8,117,997 REPOWER Shares for the Offer Price of EUR 126.00 per share (including the REPOWER Shares held by SEDT, MARTIFER and ENERGY SYSTEMS). Thus, this Offer would result in a maximum purchase price payment obligation for BIDDER of EUR 1,022,867,622. In addition, BIDDER expects to incur transaction costs and other expenses for this Offer which should not exceed EUR 30,000,000 in total. The payment obligations of BIDDER will therefore amount to a maximum amount of EUR 1,052,867,622.

The maximum amount of EUR 1,052,867,622 will be financed as follows:
It is intended that the funds necessary to acquire up to 6,057,209 REPOWER Shares and
the transaction costs are provided to BIDDER as equity contribution by SEDT. Accordingly, SEDT has committed itself by agreement of 14 February 2007 to provide the respective funds to BIDDER by means of a payment into the capital reserves of the company.
On 9 February 2007, SEDT, AE-ROTOR and SUZLON, as borrowers, have entered into a credit agreement with ABN AMRO Bank N.V. as lender (in this Offer Document also referred to as “Credit Agreement”). The Credit Agreement provides for several tranches of debt which are dedicated for the funding of the acquisition of REPOWER Shares under or in connection with the Offer (in this Offer Document also referred to as “Acquisition Facility”). The Acquisition Facility provides for an amount of debt in excess of EUR 793,208,334 necessary to cover the acquisition of 6,057,209 REPOWER Shares and the transaction costs. Funds may be drawn down under the Credit Agreement if the conditions precedent and the documentation requirements are fulfilled or waived, no event of default (as defined in the Credit Agreement) has occurred or would occur and certain other conditions specified therein and certain representations and warranties made under the Credit Agreement are true and accurate by reference to the facts subsisting at each drawdown. BIDDER has no reason to believe that the conditions will not be fulfilled. The Credit Agreement has not been terminated and no reason for termination exists.
The remaining 2,060,788 REPOWER Shares are held by MARTIFER and ENERGY SYSTEMS. MARTIFER and ENERGY SYSTEMS have under the Takeover Agreement
entered into an obligation not to dispose of these shares and furthermore pledged these shares to SEDT. In addition, in case they still dispose any REPOWER Shares, MARTIFER and ENERGY SYSTEMS have each with respect to the REPOWER Shares held by them agreed to grant an interest-free loan to BIDDER in the amount necessary to acquire any REPOWER Shares offered or sold to third parties by MARTIFER and/or ENERGY SYSTEMS in breach of the Takeover Agreement. The payouts of these loans are due no later than the working day prior to settlement of the Offer following the Acceptance Period and the Additional Acceptance Period respectively.


Expected Effects of the Offer on the Assets, Financial and Earnings Positions of Suzlon Windenergie GmbH and SUZLON Group

The consequences of the acquisition of REPOWER on the future figures of SUZLON Group’s financial statements cannot be clearly predicted today. This is, inter alia, because
the comparability of the financial information in the SUZLON Report and the REPOWER Report is limited due to the following reasons: The SUZLON Report is prepared in accordance with Indian GAAP, whereas the REPOWER Report is prepared in accordance with IFRS. Even though Indian GAAP regulations have similarities to IFRS, there might be effects on assets, financials and earnings positions based on the different accounting rules. Those accounting differences are not considered subsequently. Neither a revaluation of the purchased assets nor a purchase price allocation is considered in this pro-forma calculation. The latest available financial information of SUZLON is the 3rd quarter of the fiscal year 2006/2007 as of 31 December 2006. Nevertheless, in order to compare the same period for the effects of SUZLON Group and REPOWER and in order to underlie a comparable data basis we adopt for SUZLON Group the report as of 30 September 2006.
Furthermore, uncertainties of the financial data derive from possible differences of the assumed exchange rates.
Subject to the above reservations and based on its current assessment BIDDER believes that an acquisition of all 8,117,997 REPOWER Shares currently in issue including the estimated acquisition costs will have the following consequences on the assets, financial and earnings positions of SUZLON Group in a pro-forma description based on the financial figures set out in the SUZLON Report and the REPOWER Report:
Expected effects if 100 % of the REPOWER Shares are acquired:
o Due to the acquisition, the balance sheet total of SUZLON will increase from EUR 1,683 million by EUR 1,216 million to EUR 2,899 million.
o The item “Goodwill and other intangible assets” will increase from EUR 312 million by EUR 881 million to EUR 1,193 million. This includes the purchase price for all 8,117,997 REPOWER Shares currently outstanding, including the estimated transaction costs related to the execution of this Offer less the equity of
REPOWER.
o Since the acquisition will be financed through debt, the financial liabilities will increase from EUR 669 million by approximately EUR 1,067 million to EUR 1,736 million including the estimated transaction costs.
o All other items were determined by adding the corresponding amounts contained in the relevant financial statements of SUZLON Group and REPOWER.
o Potential effects resulting from the annual closing entry or any refinancing effects that might take place within SUZLON Group after the acquisition are not considered.


Expected effects if 74.61 % of the REPOWER Shares are acquired:
o Due to the acquisition, the balance sheet total of SUZLON will increase from EUR 1,683 million by EUR 1,003 million to EUR 2,685 million.
o The item “Goodwill and other intangible assets” will increase from EUR 312 million by EUR 668 million to EUR 979 million. This includes the purchase price for all 6,057,209 REPOWER Shares currently outstanding, including the estimated transaction costs related to the execution of this Offer less the equity of REPOWER.
o Since the acquisition will be financed through debt, the financial liabilities will increase from EUR 669 million by approximately EUR 807 million to EUR 1,476 million including the estimated transaction costs.
o All other items were determined by adding the corresponding amounts contained in the relevant financial statements of SUZLON Group and REPOWER.8
o Potential effects resulting from the annual closing entry or any refinancing effects that might take place within SUZLON Group after the acquisition are not considered.
The pro-forma consolidation is based on quarterly figures and does not comprise a full 12- months period or a fiscal year. Because of the seasonality of business and the financial results for the nine months ended the figures are not indicative for the full year’s
performance.
o Net sales and the operative earnings before interests, taxes, depreciation and amortisation (EBITDA) were determined by adding the corresponding amounts contained in the financial statements of SUZLON Group and REPOWER. Any deviation between the total amount and the sum of the individual amounts is caused by rounding differences.
o The pro forma consolidated net sales of SUZLON Group and REPOWER for nine months amount to EUR 1,125 million, the operative earnings before interests, taxes, depreciation and amortisation (EBITDA) amounts to EUR 186 million.
o In case of an acquisition of 100 % of the REPOWER Shares, the profit before taxes (PBT) is influenced by financial charges resulting from debt financing, whereas the interest rate is an estimated average of the expected terms and of the interest-free loan. Because of the finance costs SUZLON’s PBT on group level after acquisition decreases from EUR 141 million by approximately EUR 30 million to EUR 110 million. In case of an acquisition of 74.61 % of the shares, the profit also changes because of the lower financing costs from EUR 141 million by approximately EUR 30 million to EUR 110 million (without the profit component minorities).
o Synergies, one-off expenses for achieving this synergies and the integration of the business as well as increased amortization due to the purchase price allocation to the re-valued assets were not taken into account. Furthermore, potential effects resulting from the annual closing entry are not considered.


Important Milestones[6] in REpower Acquisition

The Sequence of events that took place before the acquisition of REpower was accomplished are presented below in chronological order:

5th Feb 2007

The largest single shareholder of REpower Systems AG, French AREVA S.A., announced its intention to make a friendly takeover offer to all shareholders of REpower Systems AG. This offer represented a cash offer of EUR 105.00 per share and a premium of 44 per cent on the three-month average of the stock price.

9th Feb 2007

Suzlon Windenergie GmbH announced a counteroffer to the takeover offer for REpower Systems AG released by the French AREVA S.A.. The counteroffer by Suzlon Windenergie – an affiliated company of the Indian wind turbine manufacturer Suzlon Energy Ltd. and the Portuguese steel construction company Martifer – represents a cash offer of EUR 126.00 per share (which corresponds to a market capital of EUR 1.02 billion).
Suzlon bid for the company in a consortium with Martifer SGPS, SA, Oliveira de Frades of Portugal. A new special purpose vehicle was formed for the acquisition, with Suzlon holding 75 per cent and Martifer 25 per cent. Suzlon and Martifer have signed a legally binding agreement, which sets out the terms for this offer. Part of the agreement is that Suzlon will finance the offer and Martifer will support it.
The offer that Suzlon made competes with the public tender offer of Areva for REpower. Suzlon's counter-offer price exceeded the price offered by Areva by 20 per cent, with the offer price being higher than any historic share price of REpower. The offer price was at a premium of 76 per cent on the average volume weighted share price of REpower over the last three months prior to the offer announced by Areva on January 22.

28th Feb 2007

Suzlon Windenergie GmbH delivered the offer document regarding the acquisition of the shares of REpower Systems AG at the price quoted on 9th Feb bid.

15th March 2007

Areva increased its offer to EUR 140 a share. The improved offer price of EUR 140 in cash for each REpower share values REpower at a total equity value of EUR 1,137 million Euro and represents a premium of 11.1 per cent to Suzlon Windenergie GmbH's offer. This also represents a premium of 95.9 per cent to the three-month average weighted share price.

10th April 2007

Suzlon Windenergie GmbH revised its offer from EUR 126 a share to EUR 150 a share in response to the EUR 140 offer made by Areva. The new deadline for the shareholders to take a decision has been extended further to 4th May 2007. There was a feeling that the there was a political dimension to this acquisition as the German Prime Minister might be in favor of Areva taking over REpower as Areva has a long and sound Past, unlike Suzlon which is a relatively new Indian company.


1st June 2007

Following the takeover offer, Suzlon owns 33.60% of REpower shares at the offer price of EUR 150 per share . Due to the voting-pool arrangements with REpower-shareholders Martifer and Areva, Suzlon controls now in total 87.1% of the votes. In the additional acceptance period, which lasted from 11th until the 25th of May, Suzlon received 25.46% of REpower’s capital.


Shareholder Structure After Acquisition

Suzlon: 33.60%
Martifer: 23.00%
AREVA: 29.90%
Free-Float: 13.50%



1. http://uk.reuters.com/article/oilRpt/idUKBOM474320070602

2. http://www.suzlon.com/images/you/PM%20RED%201%206%20%2013%2030%20ENG.pdf

3. http://www.martifier.com/

4. http://suzlonwindenergie.com/
Convenience Translation of German Offer Document (not approved by BaFin) (pdf)
5. http://www.repowersystems.de/index.php?id=88&L=1
6. http://suzlonwindenergie.com/
Convenience Translation of German Offer Document (not approved by BaFin) (pdf)
7. http://www.thehindubusinessline.com/2007/08/11/stories/2007081150542100.htm
8. http://www.vccircle.com/blog/Deals/_archives/2007/5
9. www.thehindubusinessline.com
10. http://www.repowersystems.de/index.php?id=88&L=1