In a significant merger and acquisition (M&A) deal in the power sector, India’s heavy engineering major Larsen & Toubro (L&T) has agreed to sell its electrical and automation (E&A) business for Rs 140 billion (SGD 2.8 billion) to a consortium of French major Schneider Electric SE and Singapore’s state investment firm Temasek Holdings. The deal is reportedly the biggest to be announced in the Indian market this year. As a part of the all-cash transaction, energy management and automation specialist Schneider will own 65 per cent stake in the combined business while Temasek will have a 35 per cent stake. Schneider Electric will combine the acquired business with its existing low voltage and industrial automation products business in India.
Deal specifics
The E&A business, which has factories in India as well as in Saudi Arabia, the UAE, Kuwait, Malaysia, Indonesia and the UK, had a net revenue of Rs 50.38 billion or about 4.5 per cent of L&T’s consolidated revenue in 2016-17. The business offers low and medium voltage switchgear, electrical systems and equipment, energy management, metering and industrial automation solutions. The transaction includes all the current business segments of the E&A unit, except marine switchgear and Servowatch systems.
The transaction is expected to be closed over the next 18 months. L&T E&A will be acquired for an enterprise value of Rs 140 billion (Euro 1.75 billion). Based on Schneider Electric’s estimate, this reflects a multiple of 2.5x the sales and 15x the estimated earnings before interest, taxes, depreciation and amortisation (EBITDA) in 2018-19.
Of the Rs 140 billion deal, Schneider will contribute an equity of Rs 34.25 billion in cash while Temasek would contribute an equity of Rs 50.75 billion in cash. Temasek is a global investor anchored in Asia, with India accounting for around 5 per cent of its SGD 275 billion net portfolio value based on underlying assets, as of March 31, 2017. The joint venture (JV) will also carry debt financing amounting to Rs 55 billion (Euro 690 million) to fund the balance of the acquisition.
In revenue terms, the transaction is expected to generate Rs 3 billion annually in EBITDA, with a five-year ramp-up. Transaction costs are expected to be in the range of Euro 20 million-Euro 30 million, and integration costs are expected to be in the range of 1-1.5x the amount of synergies.
Expected synergies
Schneider Electric has over five decades of experience in the Indian electrical equipment market. The company entered India in 1963 through a JV with the Tata Group and established a fully owned subsidiary in 1995. Schneider has since expanded its presence in India through organic growth as well as acquisitions. Some of the key acquisitions have been Meher Capacitors (a leading supplier of power factor correction capacitors), Luminous Power Technologies (a leading manufacturer of power backup systems), Conzerv (a major digital energy meter manufacturer), Digilink for Network Connectivity and APW for IT racks, among others. Globally, one of the group’s biggest acquisitions was that of France-based Areva T&D’s distribution business in 2010.
With the current acquisition, India will become the third largest country for Schneider Electric in revenue terms (Euro 1.6 billion), at par with France. Schneider plans to develop India as a fourth hub globally (the other three being the US, France and China).
Commenting on the deal, Jean-Pascal Tricoire, chairman and chief executive officer (CEO), Schneider Electric, stated, “By bringing together the low voltage and industrial automation products business of Schneider Electric India and L&T E&A, we are creating an innovative company in energy management and industrial automation in one of the world’s largest and fastest growing economies, India. Our market reach in India will be further strengthened by the extensive ecosystem of partners of the E&A business, and we will harness the strengths of both the organisations to address the electrical and automation requirements of the India and global markets. India will become our third largest business in the world, and one of our four major R&D and manufacturing global hubs. We are pleased to partner with Temasek, which brings a tremendous expertise of Asian markets.”
As for L&T, the divestment of the E&A unit is a part of its plans to sell its non-core business. L&T has sold several non-core assets in the past year. Further, according to estimates, this deal will help cut its core debt by almost half, which stood at Rs 208 billion as of December 2017. “The divestment of the E&A business is in line with L&T’s stated intent of unlocking value within the existing business portfolio,” says S.N. Subramanyan, CEO and managing director, L&T.
The deal is also earnings accretive for L&T, say analysts. According to Morgan Stanley, “The L&T stock trades at 24x the estimated earnings per share for 2018-19 based on consensus earnings. We view the deal positively from a sentiment perspective as it reiterates L&T’s resolve in unlocking value while continuing to dominate the engineering, procurement and construction space.”
Going forward, the combined entity seeks to leverage the strong growth in the buildings and infrastructure segments, coupled with the growth in industrial manufacturing driven by the government’s Make in India programme.