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Blackstone looks to power portfolio with Kirloskar Oil Engines buy

MUMBAI: Blackstone, the world’s biggest private equity fund, has emerged the front runner to buy

Kirloskar Oil

Engines Ltd, the listed flagship company of the $3.5-billion Kirloskar Group that is in the middle of an escalating family feud, multiple people familiar with the development said.

Promoters own 59.33% of Kirloskar Oil Engines (KOEL) that has a market cap of Rs 4,947 crore at present. Pulak Prasad’s Nalanda Capital, with 9.61% stake, is the second largest shareholder in the company that makes diesel engines, agricultural pump sets and generating sets.

One of the proposals being suggested is splitting the company by demerging its oil engines business into a new entity, sources said. Blackstone will step in then to buy controlling stake for around Rs 2,600 crore, or about $400 million, and follow it up with an open offer for an additional 26% stake, sources said.

Both companies upon demerger will have mirror shareholding. The cash and investments of around Rs 1,000 crore will be left with the old company, which in effect will become a holding company, sources said.

This structure is similar to what

Crompton Greaves

did with its consumer business before selling it off to Advent Private Equity. But such a move may face backlash from the minority shareholders.

There is also a Chinese strategic investor in the fray whose identity could not be independently verified though Blackstone is believed to be the preferred choice.

Earlier, Cummins Group, one of the world’s largest manufacturers of engines and power generation products, was evaluating buying out KOEL but chose not to pursue it.

Ambit is running a formal sale process. The transaction is expected to get announced in June. Mails sent to Atul Kirloskar, executive chairman of KOEL, did not generate a response till press time. Blackstone declined to comment.

Incorporated in 1946, Kirloskar Oil Engines manufactures and services diesel engines (primarily in the range of 2.5 to 740 horsepower) and diesel generator sets. It is the largest producer of non-automotive diesel powered engines in India. Its large engines are used for nuclear, marine and stationary power plants and power generating units for residential, commercial, marine and defence applications and off-highway equipment. The company is a dominant player in the agriculture pump sets market. It is the largest producer of non-automotive diesel powered engines in India. The company has more than 2,400 employees spread across the country and supplies engines to international markets as well, including the Middle East, Africa and South Asia.

“The next generation of the Kirloskar family is not keen on running the business, plus it is a stodgy manufacturing setup in a sunrise sector,” said an official in the know. “There are several eco-friendly technology options that are coming up, so the growth prospects are also limited,” the person said.

Kirloskar brothers Atul (61) and Sanjay (60) are now also entangled over a bitter legal fight with their mother, 82-year-old Suman Kirloskar, now siding with her younger son. A fight that started over a property dispute has now snowballed into a full blown tussle over the partition of assets held by Chandrakant Shantanu Kirloskar Hindu Unpided Family (HUF) in the Pune civil court.

The Kirloskar group is also a minority shareholder in Toyota Kirloskar Motor Pvt Ltd, which manufactures Toyota cars in India.

The company has manufacturing units in Pune, Kagal and Nashik (all in Maharashtra), and Rajkot (Gujarat) and caters to the agriculture, power generation, industrial and construction machinery sectors. According to its recent corporate filings for fiscal 2017, net revenue of Rs 2875 crore, and a net profit of Rs 173.62 crore. In addition, Kirloskar Oil Engines also has a surplus of about Rs 1,006 crore as on March 31, 2017.

In the domestic market, apart from unorganised players, Kirloskar Oil Engines competes with branded manufacturers such as Cummins India Ltd, Ashok Leyland Ltd and Mahindra & Mahindra Ltd in the medium-range diesel engine segment.

Diesel generator sets manufactured by the company are branded as Kirloskar Oil Engines Green Gensets. Kirloskar Oil Engines Green also offers customised power solutions. In June this year, the company acquired a majority stake in La-Gajjar Machineries (LGM), the maker of Varuna and Raindrop brands of electric pumps, at a valuation of 7.89 times earnings before interest, taxes, depreciation and amortization.

The Kirloskar group also manufactures a wide range of industrial products such as automotive castings, air compressors and air conditioning solutions among others. Kirloskar Brothers Ltd (KBL) is one of the largest manufacturers of industrial pumps in the country. KBL provides fluid management solutions for large infrastructure projects in the areas of water supply, power plants, irrigation, oil & gas and marine & defence. The company manufactures a range of industrial & petrochemical, agriculture & domestic pumps, valves and hydro turbines.

“We expect a 7% earnings CAGR over FY17-20. Considering the greater downward risk in the overall business due to pressure in the low kVA business, we expect the company to be de-rated,” Bhalchandra Shinde, analyst with Anand Rathi, said while giving a “sell” call to the stock. “Though the high-HP business is gaining market share, low-kVA gensets are affected by the transition to green options such as batteries and solar power, especially in the tower business. In agri, Shinde argued, oil-engine pump-sets have been hugely affected by power surplus across India while in industrials, “strong growth may arise from increasing road construction, but will not offset the downside risk in gensets and pump sets,” he said.

Toshiba CEO Nobuaki Kurumatani resigns as buyout offer stirs turmoil

Toshiba’s CEO resigned on Wednesday as a buyout offer from a private equity fund stirs turmoil inside the storied Japanese company, with reports suggesting two other funds are considering bids.

Nobuaki Kurumatani’s resignation is the latest development in years of upheaval at the firm, which only won back its spot on the first section of the Tokyo stock exchange earlier this year after restructuring.

The board accepted Kurumatani’s resignation “as he has completed his mission of revitalising Toshiba”, Osamu Nagayama, head of the firm’s appointment committee told reporters after the company confirmed the departure.

Kurumatani declined to appear before journalists, but a statement from him was read out at the event.

His departure comes as board members raise questions about the buyout offer from CVC Capital Partners, where Kurumatani formerly headed Japanese operations — though Nagayama insisted claims of a conflict of interest had “nothing to do” with the resignation.

The private equity firm is reportedly offering a deal in excess of $20 billion, but there are reports that some in Toshiba see that sum as too small.

The Japanese conglomerate has worked to right the ship after a major accounting scandal in 2015 and the 2017 bankruptcy of its US nuclear subsidiary.

After sweeping restructuring, its earnings rebounded and it returned to the prestigious first section of the Tokyo Stock Exchange in January.

A statement from Kuramtani said he was stepping down given the return, as he had “completed my mission”.

But the departure is likely to be seen as a reflection of internal disagreements over the CVC offer.

The Financial Times said Wednesday that another private equity fund, KKR, is planning to offer its own larger buyout proposal.

And Bloomberg News reported that a third, Canadian Brookfield Asset Management, was also exploring a possible offer.

Toshiba officials did not address the reports at Wednesday’s press conference.

‘Sticky situation’
Toshiba last week confirmed it had received the CVC offer, which would take Toshiba private. Delisting the firm could produce faster decision-making by Toshiba’s management, which has clashed with shareholders recently.

It could also allow Toshiba to concentrate resources on renewable energies and other core businesses.

But any buyout offer is likely to face significant challenges, including securing financing and regulatory approval.

Nagayama said Toshiba would consider CVC’s offer cautiously but warned that it “lacks detail as an initial proposal”.

“It’s not something Toshiba has asked for, and it has come suddenly,” he said.

“We will make the best choice for shareholders, our employees, and society” if a formal proposal is made, said Toshiba’s new CEO Satoshi Tsunakawa.

Kurumatani worked for the CVC between 2017 and 2018 and his departure will “remove uncertainty over potential conflicts of interest”, said Justin Tang, head of Asian research at United First Partners.

It will also “force the board to seek other offers that are in the best interests of shareholders”, he told AFP.

“It is a very sticky situation at present.”

CVC reportedly hopes to secure financing assistance for its buyout bid and Toshiba last week warned that was likely to involve “a substantial amount of time and considerable complexity”.

The CVC offer is reportedly around 5,000 yen a share, but Tang said he believes “a price north of 6,000 yen is necessary to get shareholders over the line”.

Toshiba shares closed up 5.76 percent at 4,860 yen.