The Hindu Business Line : Suzlon: Winds blow in favour

The Suzlon Energy stock was given the thumbs up by the stock market on Friday, with the company and its rival Areva deciding to end the bidding contest for German wind turbine builder REpower Systems by entering into a "co-operation" agreement.

The stock surged 22 per cent during intra-day trade, on relief that Suzlon would now be spared a substantial debt burden from the acquisition, which some believed was stiffly priced at current market levels.

Voting power sans cash

The agreement would give Suzlon the voting support of Areva for any proposals it may want to push through on the restructuring of REpower.

Areva, in turn, will have a guaranteed exit option at its discretion after a year.

The company would also be a preferred supplier for transmission and distribution work for Suzlon globally.

For Suzlon, this would mean effective control over 60 per cent of the voting power in REpower (including Areva's 30.6 per cent stake) without any immediate cash outlay to mop up additional shares in the company.

Suzlon may also corner a portion of the 38 per cent stake held by other holders through its offer of 150 euros per share.

For investors in Suzlon Energy, the agreement would ease concerns over the mounting debt in the company's balance sheet.

The company's capex plan of about Rs 3,300 crore may also proceed without any concerns on whether the balance sheet can handle the additional fundraising.

These concerns may, however, arise again a year or two later if Areva and then Martifer decide to exercise their exit option.

Business synergies

In terms of its business, the REpower relationship is likely to provide Suzlon a good footing in the European market, especially in Germany.

REpower has an established technology base for offshore development of wind turbines, which is gaining ground in Germany on the back of recent regulations on costs incurred by offshore wind turbine investors.

While REpower's latest results have not been encouraging, restructuring through cost savings and supply of components such as gear boxes from Suzlon may have the potential to improve margins over the long term.

When Suzlon earlier announced that it was willing to co-operate with Areva, it had clearly tuned its sails to suit the direction of the wind.

The direction, however, appears to be in sync with its initial objectives.

During its IPO, Suzlon had expressed its intention to move towards vertical integration, reduce dependence on suppliers for critical components and achieve better geographical diversification.

With the acquisition of Hansen Transmission and increased investments in components (such as tower and foundry/forgings), the company appears to be making significant progress in each aspect of this strategy.

REpower may also fit in well, but not before Suzlon nurtures the company with the right inputs.

Suzlon's recent financial results have shown that on a consolidated basis, operating margin pressures may continue to persist in the short term.

However, the recent strategic moves, if they result in higher integration, may well arm the company to combat competition and increase its margins.