Mahindra & Mahindra to acquire Pipavav Defence in Rs 3,000-crore deal

MUMBAI: Mahindra & Mahindra, one of India’s largest diversified conglomerates, will purchase a majority stake in Pipavav Defence and Offshore Engineering (PDOE) for roughly Rs 3,000 crore at Rs 66 a share in a three-phase deal, two people with direct knowledge of the plan said. Along with debt of around Rs 6,800 crore and fresh equity that will be issued, the deal is seen as having an enterprise value of Rs 12,000 crore, they said.

In the first phase, Mahindra Defence Systems (MDS), which supplies various types of launchers for ships, along with systems and components to customers other than the Indian Navy, will purchase a 19% stake in Pipavav Defence from the founders, Chairman Nikhil Gandhi and his younger brother and Managing Director Bhavesh Gandhi, who own about 45% of the company.

Later, Pipavav Defence will issue preferential shares to the acquirer to raise the latter’s stake to 40%. In the third phase, MDS will make an open offer to purchase an additional 26% stake from the public to abide by takeover guidelines. “The broader contours of the deal involve a three-step transaction — a direct purchase from promoters, issue of shares to the buyer and, later, an open offer,” said one of the two cited above.

Consolidation in Defence Sector

“Bankers are working on the structure and finer details,” said a person with direct knowledge of the plan. Kotak Mahindra Capital is advising Mahindra on the deal.

The Mahindra Group’s public relations agency said it didn’t comment on market speculation. A Pipavav Defence spokesperson declined comment. ET was the first to report on February 5 that Mahindra, India’s largest motorcycle maker Hero Group and French shipbuilder DCNS had started talks separately with the Gandhis to purchase a controlling stake in the company that has facilities to build warships, submarines and LNG carriers.

If the acquisition goes through, it could be the first of the consolidation moves among Indian firms expected in the sector after the Narendra Modi government allowed foreign companies to own up to 49% in defence equipment manufacturers as part of its strategy to woo investment. A successful foreign bidder could hike its stake to as much as 49% through an open offer, one of the people said. “In case an Indian company buys the 19% stake, it will have the option to raise it to 51%,” ET had reported.

Pipavav Defence shares again witnessed heightened activity on Wednesday, surging by 16% to close at Rs 63.95 on the Bombay Stock Exchange for a market value of Rs 4,708 crore. Lenders have been pushing the promoters to raise fresh equity as debt has ballooned to about Rs 6,800 crore. The PDOE board is scheduled to meet on Friday, February 13. The company’s stock has seen a series of spikes in the past few months amid talk of a possible stake sale. Indian business groups such as Mahindra, Reliance Industries, Anil Ambani-led Reliance Group and the Tata Group have shown keen interest in the sector.

Mahindra, for instance, is seeking technology tie-ups with foreign companies to build everything from guns to warships through its MDS unit. In a recent media interview, Chairman Anand Mahindra had said naval systems were a focus area for the group. A successful deal will give Mahindra an order book of Rs 9,000 crore. In addition, the company has bid for projects worth Rs 30,000 crore. The Gandhis are known for building large infrastructure projects and selling them off while retaining a minority stake.

In early 2000, they built one of India’s largest special economic zones on the outskirts of Mumbai jointly with the state development agency and later sold it to Reliance Industries. Pipavav Defence has sold minority stakes to overseas investors in the past at higher valuations. In November 2010, it sold a 3.5% stake to Singapore’s Sembcorp Marine at Rs 45 a share and, two years later, another 3.5% to Sweden’s Saab AB at Rs 82 a share.

India is one of the largest defence spenders globally. According to government estimates, the cumulative defence budget in both capital and revenue expenditure has increased 32% between fiscal 2011 and fiscal 2014 to Rs 2.04 lakh crore. About 70% of India’s defence requirements are met through imports and the rest through local production by state-owned companies.

The Modi government has grand plans to strengthen the country’s defence capabilities while also increasing local procurement of equipment. Raising the overseas investment limit is part of efforts to attract private investment to boost local manufacturing. Pipavav Defence posted a loss of Rs 68.33 crore in the quarter through September 2014 from a net profit of Rs 4.54 crore a year earlier. Its net sales during the quarter shrunk to nearly a fourth of what it posted in the previous year.