Suzlon may go the Tata way
AMIT BHANDARI
TIMES NEWS NETWORK[ WEDNESDAY, FEBRUARY 14, 2007 01:14:25 AM]

Some months back, Suzlon chairman Tulsi Tanti laid out his long-term plan, wherein he wanted only 20% of the company’s business to come from India. The US, China, Europe and the rest of the world would all account for 20% each. The bid for German wind energy company REpower seems to be a step towards that objective.

Suzlon is bidding for 100% of the equity of REpower in a JV with Martifer of Portugal, which already owns a 25% stake. Martifer will transfer their holdings to the JV company, while Suzlon will bring in the cash. The total value of REpower is being pegged at $1.3 billion.

This wouldn’t be the first such acquisition for Suzlon, which had acquired Belgium-based gearbox manufacturer Hansen for 465 million euros in March 2006. Mr Tanti feels the price paid is justified, as Suzlon and REpower are in the same business and the two companies share synergies.

However, on the face of it does seem that Suzlon is paying too much for REpower. The bid for one, at 126 euros, is 20% higher than the bid by French company Areva, which was also in the running. If REpower goes the Corus way, the final price could be a lot higher than the initial bids.

Moreover, REpower isn’t making money. For the nine months ended September 2006, Areva recorded profit of less than 1 million euros. The company had recorded a loss of 8.3 million euros for the corresponding period in 2005. Clearly, past financials don’t justify the price. In effect, Suzlon is paying close to $1 billion for the footprint in Europe.

However, that may not be the force driving Suzlon. The company is already the largest player in India but has a small footprint in markets like Europe, China and the US. It has recently set up operations in the US and China, and if it is successful in acquiring REpower, will get a base in Europe, which currently accounts for only 6% of Suzlon’s current order backlog.

REpower is not a manufacturing company. It purchases equipment such as wind-turbines, blades and gear-boxes from various manufacturers and assembles windmills. Suzlon, on the other hand, does most of its manufacturing in-house. The difference is apparent when the raw material costs for the two companies are compared — 82% of sales for REpower versus about 62% for Suzlon.

Unless REpower is able to procure equipment at lower prices, improvement in margins isn’t likely. Suzlon could be of some help as it owns a gearbox company. Gearboxes account for 18-20% of the total cost of a windmill, so there could be some benefit. Also, REpower’s presence in areas like offshore wind farms could help Suzlon.