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Raiders on the high seas

Why are two shipbuilders, Bharati Shipyard and ABG Shipyard, slugging it out with offers and counter-offers to lay their hands on an offshore services provider? Virendra Verma finds out.

Virendra Verma | Print Edition: August 9, 2009

In one corner of the ring is a takeover artiste who has grown his empire via a string of opportunistic acquisitions. In the other corner is an industry veteran who it would appear is ahead on points after the first couple of rounds. But then this is a slugfest that won’t end in a hurry, and which promises to go down to the wire.

Why ABG and Bharati want great offshore
1. To become integrated companies, from shipbuilding to operators
2. Several global instances of similar forward integration
3. Offshore service providers earn higher margins than shipyards
4. Great Offshore is a good hedge during downturns
5. Payments in shipbuilding are less stable and come in stages

The glittering trophy that’s up for grabs is a Rs 1,081 crore provider of offshore services and rigs to oil companies. Winning the bout is an imperative for both fighters to ensure stability of operations during a slowdown and even beyond. Even as punches and counterpunches continue to be thrown, the stage is set for an exciting finish. By the first week of September, it will be known who has beenknocked out and who walks away with the prize.

One of those prizefighters is Rishi Agarwal, Chairman, ABG Shipyard. The other is Prakash Chandra Kapoor, the 63-year-old Managing Director of another shipbuilding company, Bharati Shipyard, who has been a shipwright since the mid-1970s. They’re both scrapping for a controlling chunk of Great Offshore, a company from the Great Eastern Shipping Company stable that was promoted by Vijay Sheth.

Offers and counter offers from both bidders have been flying around (see Chronology of a Bidding War) and at the time of writing, Bharati had a higher offer price of Rs 405 (in an open offer to shareholders) against ABG’s Rs 375. Bharati’s edge is that it has already mopped up 19.6 per cent of Great Offshore through its subsidiaries at a cost of Rs 243 crore. ABG, in contrast, has just a 2 per cent stake and will have to fork out Rs 472 crore to acquire a 32 per cent stake. To get to that mark, Kapoor will have to put only an additional Rs 190 crore on the table.

Agarwal vs Kapoor
So, who are these warriors that have hit the high-stakes takeover trail? In 1989, a 23-year-old wet-behind-theears Agarwal returned to India after completing his MBA from Purdue University. He wasn’t keen on joining a multinational or an investment bank, but wanted to do something on his own—in a hurry. Magdalla Shipyard, owned by R.S. Nakra, was up for grabs and Agarwal was quick to buy it.

Rishi Agarwal
Prakash C. Kapoor
Rishi Agarwal, ABG ShipyardPrakash C. Kapoor, Bharati Shipyard
Acquired ABG Shipyard in: 1989 (then known as Magdalla Shipyard)Started Bharati Shipyard in: 1976
Background: MBA from Purdue University; Nephew of Shashi and Ravi RuiaBackground: Naval architect from IIT Kharagpur; worked with Mazgaon Dock
Business philosophy: Acquire shipyards and turn them around (has also acquired Vipul Shipyard and Western India Shipyard)Business philosophy: To be a pioneer in all types of shipmaking
Market cap: 902Market cap: 386
Net profit: 171.15Net profit: 133.32
Figures in Rs crore, Net profit is for 2008-09, Market cap is based on the closing price of July 16, 2009.

That became his flagship, ABG Shipyard, which went on to become India’s largest shipmaker in a few years in the private sector. But the appetite of Agarwal, a nephew of Shashi and Ravi Ruia of the Essar group, for acquisitions was only whetted by that first purchase. In the years to come, he would take over Vipul Shipyard (2007) and Western India Shipyard (2007). Now, he’s trained his sights on Great Offshore.

This time, however, Agarwal isn’t alone in his quest for inorganic growth. He’s got a strong rival in Bharati, the #2 shipyard in the country in the private sector. Promoted by Kapoor and Vijay Kumar, both IIT engineers and naval architects, their growth strategy is in sharp contrast to Agarwal’s, what with an organic thrust being the bedrock of their growth. So much so that Kapoor suggests that his play for Great Offshore should be seen as more of a helping hand to long-time friend Sheth—Kapoor acquired a little under 15 per cent of Great Offshore’s shares, which had been pledged by Sheth.

To be sure, Bharati Shipyard has a business association with Great Offshore that goes back 15 years. “We want to acquire the company (Great Offshore) because of business association and do not want it to go to competitors,” claims Kapoor, whose company makes offshore support vessels for Great Offshore. ABG, for its part, is a palpable hostile raider, which got into fray immediately after Sheth resigned as Vice Chairman in the last week of May.

“We realised there was no management so we thought it was a good time to step in,” says Dhananjay Datar, Chief Financial Officer, ABG Shipyard, which has made ships for global companies like John Fredriksen Group, A.P. Moller Group and the Indian Coast Guard. After Sheth’s resignation, Great Offshore had just four directors and no Managing Director or CEO.

Chronology of a bidding war
December 3, 2008: Vijay Sheth pledges a 12.73 per cent stake of Great Offshore to subsidiaries of Bharati Shipyard
January 2, 2009: Sheth pledges an additional 2.15 per cent stake of Great Offshore to these subsidiaries
May 5 & 6: Bharati acquires the pledged stake (totalling 14.88 per cent) from Sheth
May 30: Sheth resigns as Vice Chairman & MD of Great Offshore
June 5:Bharati makes an open offer to acquire 20 per cent more in Great Offshore, at Rs 344 per share
June 23: ABG Shipyard enters the fray with a counter offer to acquire 32.12 per cent, at Rs 375 per share
July 4: Bharati revises open offer price to Rs 405

It’s all about strategies
If two shipyards are battling for a company that operates rigs and provides offshore ships to oil companies, that’s because there’s a clear-cut strategic fit. “It’s a global phenomenon and it’s a natural integration for shipyards to move into ship operations,” says Nikhil Gandhi, Chairman, Pipavav Shipyard.

He adds that leading global shipyards like Hyundai are today also operating ships. Experts point out that the services of companies like Great Offshore will enjoy strong demand as they are used for drilling oil from the sea. “The objective (to acquire Great Offshore) is to hedge the business even as the shipping industry goes through a down cycle,” says Kapoor, who has seen three down cycles since he -co-founded Bharati. Datar explains that operating ships provides for a stable source of fixed income.

So, if Great Offshore fits like a glove into both companies, it might well be financial muscle that decides the winner. Bharati has an order book of Rs 5,000 crore to be executed by 2012, and over the past five years, its revenues jumped eightfold to Rs 1,019 crore and profits surged 22 times to Rs 133.3 crore.

In comparison, ABG’s revenues were up five times to Rs 1,412 crore and profits spurted 13-fold to Rs 171 crore over the same period. ABG’s order book is worth Rs 11,000 crore and goes on till 2014. When it comes to raising money, ABG would seem to have an edge, what with its higher market cap and promoter holding. On the leverage front, Bharati has a lower debt.

Foreign shipbuilders who have forward integrated
Company: Hyundai Heavy Industries
Area of operation: Shipbuilding
Acquired: Hyundai Merchant Marine
Areas of operation: Ship operations & logistics
Company: STX Offshore and Shipbuilding Co.
Area of operation: Shipbuilding
Acquired: STX Pan Ocean Co.
Areas of operation: Ship operations for dry bulk cargo
Company: Jaya Holdings (Singapore)
Area of operation: Shipbuilding & repairing
Diversified into: Operating offshore vessels

Bharati’s biggest advantage is that it already has close to 20 per cent of Great Offshore in the bag, via its subsidiaries. “Bharati is in a better position as it has a higher stake and a long relation with Great Offshore,” says Ajay Parmar, Head (Research), Emkay Global Financial Services. Arun Kejriwal, Director, KRIS Research, adds that it would be easier for Bharati to hit the crucial 26 per cent shareholding threshold than it will be for ABG.

With 26 per cent, a shareholder has a say in special resolutions and can also block them. What’s more, the promoters of Great Eastern Shipping—the Sheth family—still holds a 4.3 per cent stake and there is a possibility that this might also come Bharati’s way. Bharati’s open offer at Rs 405 opens on July 25 and closes on August 13. ABG’s last offer at Rs 375 opens on August 13 and ends on September 1.

But Agarwal may be in no mood to throw in the towel. A renewed counter offer could well be on the cards, what with Great Offshore’s stock price ruling higher than Bharati’s last revised bid. Clearly, the sparks have only just begun to fly. The coming days will be tension packed for both raiders, but if there’s somebody who has a smile on their faces, it’s the small shareholder who’s making a neat packet as the two shipbuilding giants slug it out.

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