Schneider, Temasek buying business unit of India's L&T for 140b rupees

Mumbai

INDIA'S Larsen & Toubro (L&T) has agreed to sell its electrical and automation business for 140 billion rupees (S$2.8 billion) to Schneider Electric SE, partnering with Temasek, in the biggest M&A deal announced in the Indian market this year.

Schneider Electric will combine the business it is buying with its low voltage and industrial automation products business in India, it said.

Schneider will own 65 per cent in the combined business, while Singapore investment company Temasek will have a 35 per cent stake.

The cash deal is part of L&T's plan to sell its non-core business at a time when India's biggest engineering group has seen slower growth in orders amid a prolonged economic downturn.

The sale matches L&T's "stated intent of unlocking value within the existing business portfolio", chief executive S N Subrahmanyan said in a statement.

Rohit Sipahimalani, joint head, India, Temasek, added: "Our investment in Schneider Electric India is another step in the steady growth of our portfolio in India over the past few years, and reflective of the type of partnership opportunities that we seek to invest into.

"India's favourable demographics, as well as its growing middle-income population and consumption trends, all represent opportunities for us to further invest in India's growing companies. We remain confident in the long-term prospects of India's economy, and look forward to more such investment opportunities in the country."

L&T said the deal includes all segments of its electrical and automation business except marine switchgear and servowatch systems.

The electrical and automation (E&A) business, which has factories in India as well as in Saudi Arabia, the United Arab Emirates, Kuwait, Malaysia, Indonesia and the United Kingdom, had net revenue of 50.38 billion rupees, or about 4.5 per cent of L&T's consolidated revenue, for the year to March 2017.

"This is a good deal for them," said AK Prabhakar, head of research at IDBI Capital, referring to the valuation. "L&T has a clear vision of divesting businesses with low margins." Goldman Sachs last week forecast a "bright" outlook for L&T, saying it expected the company's near-term earnings growth to be robust with stable order inflows and pick-up in execution.

The company's effort to deleverage its balance sheet and improve its returns over the medium term through a combination of operational improvement and non-core asset sales will be instrumental in re-rating the stock, Goldman analysts wrote in a note dated April 23.

Of the 140 billion rupee deal price, Schneider will contribute 34.25 billion rupees in cash, while Temasek will give 50.75 billion rupees. The joint venture will also take on debt of 55 billion rupees to fund the deal, Schneider said, adding it expected significant revenue and cost synergies.

After the deal, which L&T said is expected to close in 18 months, India will become Schneider's third-biggest country in terms of revenue, at par with France.

Bank of America Merrill Lynch and Citigroup advised Schneider on the L&T deal, according to two sources with direct knowledge.

L&T's in-house M&A team worked on the deal with Indian investment bank Arpwood Capital advising it, a company spokesman said.

L&T shares closed 1.7 per cent higher on Monday. Indian markets were closed on Tuesday for a holiday. REUTERS