Schneider-Temasek leads race to buy L&T?s electrical Biz for Rs 17,000 crore

Posted by Schneider Electric on November 8th, 2017

NEW DELHI/MUMBAI: Schneider Electric SE, the French industrial multinational along with it’s consortium partner Temasek, has entered final rounds of negotiations with Larsen and ToubroBSE 0.35 % to acquire its electric and automation division for Rs 15,000 – Rs 17,000 crore as India’s largest engineering group looks to prune its portfolio and exit non-core areas, said multiple people aware of the ongoing developments.

Both parties have entered into an exclusivity agreement for bilateral discussions with an aim to close all outstanding matters by this calendar end. The French-Singaporean consortium has edged past the other serious contender Eaton Corporation with its aggressive bidding, the sources mentioned above said. Others who had also earlier also evaluated the target include ABB, Siemens AG, Hitachi, Honeywell and few global buyout funds but eventually opted out because of the high valuation expectations Bank of America Merrill Lynch and Citi are advising Schneider in the transaction.

Spokespersons of Schneider, Temasek and L&T declined to comment on market speculation.

The transaction is likely to be funded as a leverage buyout where in financing will be raised on the balance sheet of the target. The division is expected to clock Rs 860 crore of EBITDA in the current fiscal. “Schneider has been really aggressive throughout. “At 20 times EBITDA this will be an expensive bet, tough even for other global peers to match,” said an investment banking official closely following the developments.

However, L&T’s high valuation expectations may still turn out to a deal breaker warned an official directly in the know. But company watchers feel prospects of a successful transaction are brighter this time around because the division’s plants have been segregated from the parent and real estate has been clearly demarcated at all the locations, thereby making it easy to value the assets. The company has been steadily monetizing its land in Powai through realty projects over the last four years.

PRUNING THE PORTFOLIO
The business is relatively short cycle and accounts for only 1% of L&T’s bn order backlog (even though it accounts for 6% of core revenue). This is a mature cash cow with return on capital employed (RoCE) at 23% (only 4.5% of L&T’s consolidated capital employed) but with a growth profile less compelling as compared to its leadership position in engineering & construction business verticals. There is also minor synergy loss on account of captive products for its transmission and distribution and automation projects business. Therefore the company revived its plans to exit earlier this year.

It also fits in with its ongoing portfolio restructuring. In the last year, the conglomerate – with a diversified presence in in technology, engineering, construction, manufacturing and financial services -- in over 30 countries with billion in revenue, has sold several non-core assets. In October, L&T sold unlisted subsidiary EWAC Alloys Ltd to UK-registered ESAB Holdings Ltd, for Rs522 crore while in August, it sold its entire stake in unlisted L&T Cutting Tools Ltd to IMC International Metalworking Companies BV, owned by Berkshire Hathaway Inc., for Rs174 crore.

In FY17, L&T monetised its stake in its two key IT subs. This, together with the divestment of general insurance business, helped the company to completely fund its investments in Nabha Power and Hyderabad Metro in FY17. Most analysts expect even going forward, investments to be limited to development businesses and consolidated capex to moderate to Rs 3000 crore annually vs Rs 8000 crore over FY12-16.

But if successful, this will be the largest divestment by AM Naik, L&T’s
non-executive chairman who just stepped down from executive positions following his 52-year stint. In case the talks fail, L&T plan B includes the option of listing.

The electrical and automation business offers a wide range of products and solutions for electricity distribution and control in industries, utilities, infrastructure building and agriculture sectors. Its product portfolios include includes low and medium voltage switchgear systems, industrial and building automation solutions, surveillance systems, energy meters and protection relays and has manufacturing facilities at Navi Mumbai, Ahmednagar, Vadodra, Coimbatore and Mysuru in India as in Saudi Arabia, Jebel Ali (UAE), Kuwait, Malaysia, Indonesia and the UK. The business runs six switchgear training centres across the country educating engineers, consultants, contractors, technicians and electricians about good electrical practices. The division generated revenues of Rs 4,650 crore and operating profit of a little over Rs 700 crore in 2016-17.

“If the deal is consummated at ~Rs150-170bn, the implied FY18E EV/EBITDA is fairly rich at 21x-23x even though it contributes ~8% to EBITDA and the growth outlook is relatively lower compared to the core E&C business,” said Sumit Kishore, capital goods and infrastructure analyst at JP Morgan. The cash would also help the company relook at large fresh infrastructure BOT project exposure after refraining for over 3-4 years. “In our base case scenario, we expect working capital pressure to ease further. Fruition of the deal could) accelerate the process of de-leveraging, offer more headroom to take on capex intensive BOT and even consider a special dividend.”

ET in its August 24th edition was the first to report that Schneider and Eaton are the final contenders in fray.

EYE ON INDIA
Schneider Corporation that specialises in energy management and automation solutions, spanning hardware, software, and services global industrial conglomerates has been aggressively expanding its foot print in Indian market. Since 2010 it has made more than half a dozen acquisition that include Luminous, Digilink, Uniflair, Areva T&D, and Invensys among others. Some of them are standalone acquisition some are parts of global deal.

For Schneider, which has relatively small operation in India comparing to Siemen AG and ABB, the acquisition will help in making a strong player in one of the fastest growing markets that is far from saturation. Its Indian subsidiary Schneider Electric Infrastructure Limited in which it owns 75% stake, has reported operating profit of Rs 67 crore on a turnover of Rs 1,288 crore, last fiscal. Its market cap is Rs 3,162 crore.

Most of the European conglomerates are facing headwinds in their home markets and a slowdown in China, once pegged as the single most important outpost for many. Indian economy that has been on a gradual rebound offers them a sweet spot, feel analysts.

More importantly, with a wide footprint, spanning across India, UAE and Saudi Arabia, a potential takeover will further consolidate their presence in several emerging geographies.

About Schneider Electric

Schneider Electric is the global specialist in energy management and automation. With revenues of ~€25 billion in FY2016, our 144,000 employees serve customers in over 100 countries, helping them to manage their energy and process in ways that are safe, reliable, efficient and sustainable. From the simplest of switches to complex operational systems, our technology, software and services improve the way our customers manage and automate their operations. Our connected technologies reshape industries, transform cities and enrich lives. At Schneider Electric, we call this *Life Is On*. Schneider Electric is the worldwide expert in energy administration and automation. With incomes of ~€25 billion in FY2016, our 144,000 representatives serve clients in more than 100 nations, Schneider Electric helping them to deal with their energy and process in ways that are protected, dependable, productive and practical. From the least difficult of changes to complex operational frameworks, Schneider Electric innovation, programming and administrations enhance the way our clients oversee and computerize their operations. Schneider Electric associated advancements reshape businesses, change urban communities and advance lives. At Schneider Electric, we call this Life Is On. Schneider Electric is leading the Digital Transformation of Energy Management and Automation in Homes, Buildings, Data Centers, Infrastructure and Industries. With global presence in over 100 countries, Schneider is the undisputable leader in Power Management – Medium Voltage, Low Voltage and Secure Power, and in Automation Systems. We provide integrated efficiency solutions, combining energy, automation and software. In our global Ecosystem, we collaborate with the largest Partner, Integrator and Developer Community on our Open Platform to deliver real-time control and operational efficiency. We believe that great people and partners make Schneider a great company and that our commitment to Innovation, Diversity and Sustainability ensures that Life Is On everywhere, for everyone and at every moment.