Apollo Global Management had announced in end-June that it proposes to invest about Rs 1,575 crore in steel pipe-maker Welspun Corp and affiliated companies. Welspun’s share closed at Rs 169 the day before the deal was announced. Apollo was to invest in a combination of debentures and global depositary receipts, at a conversion price of Rs 225, indicating a premium of about 33%.
But the markets have tumbled since then, partly due to concerns of what rising interest rates –due to central bank action to curb inflation- may do to economic growth in India, and the financial worries facing US and Europe. The Welspun share has fallen to Rs 129, which means the conversion will happen at a premium of 74% now.
Apollo’s sticking to the deal can mean several things. One, it has to protect its market reputation, which will wane if it walks away from a deal after signing it, because the markets have fallen. Two, Welspun signed an iron-clad agreement, which made it difficult for them to renege. Three, Apollo may be taking a longer term view of this transaction, which does not get altered by external events. The last point is what longer term shareholders of Welspun will be interested in, as Apollo’s decision to invest may well be a vote of confidence.
Here is how the final transaction looks:
Welspun Corp: listed group flagship which fabricates steel pipes used chiefly by the oil and gas industry.
Apollo has invested $290 million or Rs 1,305 crore in all: $175 million in the form of convertible debentures and $115 million as global depositary receipts (with no voting rights). The debentures on conversion will yield a 13.3% stake, the conversion price is Rs 225, and the GDRs have been subscribed to at the same price.
Welspun Maxsteel: a privately held company which makes sponge iron and was acquired from Grasim Industries (Vikram Ispat division).
Apollo has acquired a 12.5% stake in Welspun Maxsteel from Welspun Steel –another privately held company- for $31 million or about Rs 140 crore. It will invest another $29 million or Rs 131 crore directly into the company.
Later, Welspun Corp (as per the first announcement) will buy the remaining 87.5% stake in Maxsteel for Rs 805 crore.
Thus, the transaction is substantially towards Apollo funding the buyout of Maxsteel, via the publicly-listed company Welspun Corp, which gives it an easier exit option. That is, whenever its exit price target is reached, it will find it easier to offload its stake if it’s a publicly-listed company.
Apollo was also considering investing about $150 million or about Rs 675 crore in Welspun Infratech, a subsidiary of Welspun Corp. This transaction has not reached closure, as yet, and discussions are still on. The money is to be used for specific projects that the infrastructure company undertakes.