Analysis: the divorce of Suzlon and Senvion

GERMANY: Better late than never. Suzlon has agreed to sell its subsidiary Senvion to US firm Centerbridge Partners, in a deal that releases the Indian and German manufacturers from around seven years of financial constraint.

Suzlon has sold its subsidiary Senvion to a private equity firm
Suzlon has sold its subsidiary Senvion to a private equity firm

Centerbridge is a private investment firm with around $25 billion (€22.2 billion) in capital under management.

Frustratingly Suzlon's enormous debts were increasingly restricting its room for manouvre just as the new Indian government had decided to encourage renewables expansion. But thanks to the cash sale, Suzlon should free itself financially to a sufficient degree to enable it to participate effectively in its home market.

It gets €1 billion plus an earnout of €50 million, which may be related to Senvion finally securing the deal to supply 54 of its new 6.2MW turbines to RWE Innogy's 335MW Nordsee One project. A technical hitch with the turbine prompted RWE to re-tender in April 2014. At around €1.3 million per megawatt, as calculated in an offshore costs study by Prognos and Fichtner, this equates to revenue of around €436 million.

Indian wind push

The outlook for wind in India has certainly taken a turn for the better. The government restored the accelerated depreciation tax benefit in its July budget "to give much-needed relief to wind power developers and to ensure ramp-up of production". A memorandum of understanding was signed on 1 October by public institutions and major companies to set up a joint venture company to build India's first demonstration offshore wind project off the Gujarat coast.

Tulsi Tanti, chairman of the Suzlon Group, told the press in October 2014 that the company plans a pilot 300MW offshore project off the coast of Gujarat — which would require around 50 turbines — on a pilot basis. The divestment deal includes handing a production licence for Senvion's offshore turbine exclusively for the Indian market to Suzlon, which makes it the only Indian company able to offer a tried-and-tested machine for the upcoming first Indian offshore wind project. Senvion has installed 140 offshore turbines at six projects since 2006.

Similarly, Centerbridge's acquisition of Senvion, after seven years of Suzlon ownership, may add a "stars and stripes" feel to the German turbine manufacturer to increase its attraction for deployment in the slow-moving US offshore market.

The National Offshore Wind Energy Grid Interconnection Study (NOWEGIS), funded by the US Department of Energy and released in September 2014, concluded there is potential for integrating at least 54GW of offshore wind into the US grid by 2030.

Centerbridge may be betting that an American-owned Senvion can play a role from the beginning. The NOWEGIS report said: "Although offshore wind is not presently generating electricity in the United States, approximately 5GW of projects could be deployed in the next decade". Around 830 turbines or an average 83 per year could be required. One of the 12 key offshore barriers identifed in the study is lack of domestic manufacturing.

However, the problems surrounding the 468MW Cape Wind project, arguably the country's flagship offshore development, hardly give confidence there is a burgeoning market.

Whether Senvion will be split into offshore and onshore wind turbine manufacturing divisions within the coming years as its new owner looks to maximise the value of its investment remains to be seen. Assuming the US and Indian offshore markets firm up within the next six to ten years, they could each provide sufficient potential for a production base. Recent offshore developments in France indicate that around 1.5GW of offshore wind with a value of roughly €2 billion merits setting up an offshore turbine assembly works.

Also as part of the divestment deal, Senvion gets a licence from Suzlon for its new flagship low wind speed S111-2.1MW technology solely for the US market, possibly as a quid pro quo for the development costs of Senvion's offshore turbine.

Questions remain

However, this is a deal that raises many questions. In terms of the S111 license, Senvion itself denied there was a deal stating that its current range was adequate for the US. When questioned about this, Suzlon said the arrangement was made with itself and Centerbridge and that "Senvion management would be made aware about [it] later."

Additionally, there was little word about the manufacturing arrangements. Since 2011, Senvion's 2MW turbine nacelles and hubs have been manufactured at Suzlon's plant at Padubidri. In recent years, there have been extensive efforts to align the two companies supply chain.

Aside from the licence deals, the parting of Senvion's and Suzlon's ways sees Senvion mainly focused on Europe, Canada and Australia. while Suzlon will concentrate on its home market but also (puzzlingly in view of the S111-2.1MW licence deal ) the US, as well as China (where Senvion will wind up its presence in business year 2014/2015 ) and emerging markets Brazil, South Africa, Turkey and Mexico.

Centerbridge says it will work together with Senvion's management for continued development as a profitable and growing company. To what extent Senvion's cash flow will be required to help pay the all-cash acquisition is not clear. Media reports say Centerbridge will contribute about €550 million to the total purchase price of €1.05 billion — or roughly ten times Senvion's EBIT in business year 2013/2014.

Senvion expects to increase revenues to €1.9 billion, plus or minus 10%, in current business year 2014/2015 to 30 March, after €1.806 billion in the previous business year. It also expects to improve on the EBIT of €101.2 million achieved in business year 2013/2014. After taking account of restructuring effects in that year of €38 million, Senvion's EBIT drops to €63.2 million, according to company accounts.

Centerbridge invests in business where there is a discount to intrinsic value, it said in an August "private debt fund commitment" document. Its strategy is to obtain control and work actively with management to drive value-creation initiatives, explained the company portfolio advisers when recommending Pennsylvania Public School Employees Retirement System to invest in Centerbridge's third investment fund in a letter dated July 2014.

One of Centerbridge's first moves may be to renegotiate Senvion's latest syndicate credit agreement, signed in March 2014, freeing the ring fence that had prevented Suzlon from profitably integrating its subsidiary.

Amongst the credit agreement arrangements, the banks may cancel the credit line if a domination or profit transfer agreement is set up, if there is failure to comply with certain financial covenants, or in the case of a change of control. Dividend payments are also currently only possible to a limited extent.

The March 2014 agreement raised Senvion's credit line to €850 million, and gave more flexibility to facilitate project business. It replaced a 2012 agreement for €750 million. As with the old credit line, the new credit line was secured by Senvion assigning its registered and pending patents to the lenders. But to provide additional security, the bank consortium also enjoys a blanket assignment of all receivables (outstanding bills) and transfer of ownership of finished and half-finished products and raw, auxiliary and operating materials, Senvion said.

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