Tuesday, November 4, 2008

Suzlon may face legal action if it buys Martifer stake in REpower

Suzlon Energy might face legal action from lenders if the company goes ahead with the acquisition of balance stake of Portuguese company Martifer in REpower Systems AG to gain access to the European markets.

On Tuesday, Suzlon and Martifer said they were negotiating a schedule for the wind energy major to buy 22.48 per cent stake of Matifier in Germany's REpower.

Suzlon shares closed 20.57 per cent higher at Rs 55.40 on BSE on the news.

Suzlon had agreed to complete the purchase of Martifer's stake in Repower for 270 million euros ($344 million) by Dec 15, 2008.

A source familiar with the development said, Suzlon is exploring options to sell its stake to private equity firms to raise funds for the REpower acquisition.

Analysts tracking Suzlon said if the Martifer sale cannot be pushed back, we expect Suzlon to breach its debt covenants, potentially resulting in legal action from its lenders.

Suzlon has debt equity ratio of 1:1 at present and as per the agreement with its lenders (debt covenant) it has to maintain this ratio. So if the company goes ahead with the deal, there is every possibility that it may exceed this ratio and will result in breach of the company's debt covenants, another analyst said.

“The punitive action might be in the form of high interest rates or recall of sanctioned loan,” he added.

Earlier, Suzlon decided not to try to exercise the domination and profit transfer agreement with REpower due to opposition from lenders who will be financing the next round of growth plans for REpower.

Suzlon had announced a $360 million rights issue to buy Martifer's stake in REpower. The issue was subsequently called off because of the poor response.

However, many analysts are also of the opinion that with Suzlon struggling to bag any orders in the last six months, next stage of growth at Suzlon would be powered by REpower. However, the company has to get the domination control of over 90 per cent in REpower to use its technology and which can only happen when the company picks up the 22 per cent stake of Martifier.

At present Suzlon has 66 percent stake in REpower which, according to German law, doesn't allow the company to exercise domination over a company.

No comments: