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Indian contender beats nuclear rival -- Suzlon takes control of German Repower

The four month battle for control of German wind turbine builder Repower Systems is over. Indian competitor Suzlon emerged victorious late last month, with 60% of Repower coming under its control after agreeing a truce with its rival for the company, French state-owned Areva. The battle ended with statements from both Suzlon and Areva on May 24, the day before the deadline for Repower shareholders to accept Suzlon's offer of EUR 150/share or that of Areva for EUR 140/share.

Rather than throwing in the towel and relinquishing its 30% stake in Repower, held since September 2005, Areva agreed to co-operate with Suzlon. According to Suzlon, Areva "agrees to vote in accordance with Suzlon's proposals (subject to the customary protection of other minority shareholders)." Areva's consolation prize for bowing to Suzlon in all decision making is "a guaranteed exit of its shareholding in Repower at its discretion," says Suzlon.

Areva, a conglomerate with nuclear power interests, points out that the earnings already achieved from its investment in Repower influenced its decision. The bidding battle pushed Repower's share price to a high of EUR 168, four times the price at the time of Areva's initial investment, representing "very substantial value created" of over EUR 350 million, says the company. The share price dropped sharply to EUR 150 on news of Suzlon's victory. Whether Areva's exit clause is time-limited is a matter of commercial confidence, says Areva spokesman Julien Duperray.

Areva launched the first move for a friendly takeover of Repower in January with an offer of EUR 105/share, valuing Repower's equity at EUR 850 million, a 17% premium on the share price at the time. A surprise intervention by Suzlon, in partnership with Portugal's Martifer group, which owns 23.2% of Repower, came on February 28 with a EUR 126/share counter bid. Areva increased its offer to EUR 140/share on March 15, revaluing Repower equity at EUR 1.137 billion, before Suzlon topped Areva with an offer of EUR 150/share, valuing Repower at EUR 1.22 billion.

With the run-up to the French presidential elections in full flow at the time, state-owned Areva's interest in acquiring a German wind turbine supplier is not likely to have been high on the political agenda in France. No new bid was forthcoming. Furthermore, Areva's statement last month that the "late point in time for a potential increase of its offer" made it "unlikely that it can obtain a majority of shares," indicates its hands may have been tied. The French state supervisory office for publicly-owned enterprises, Agence de Particiption de l'Etat, possibly played a part in ending Areva's efforts to take control of Repower.

Areva's role

Duperray stresses that Areva has no plans to exit Repower. Indeed the company still seems bent on making capital from its German wind power adventure. As part of the deal, it has gained new status as a "preferred supplier of Suzlon in the field of electricity transmission and distribution." No details are forthcoming.

Areva is the world's third largest company in transmission and distribution, says Duperray. With long lead times for nuclear plant construction, wind offers good potential for transmission and distribution business instead, points out Keith Hays from renewables advisory firm Emerging Energy Research. Areva has done cabling for offshore wind in the UK, supplies substations, and could hope for offshore business from Repower. "If that was the key priority, aside from turbine manufacture, it makes sense for Areva to stay involved, even without a bigger role in Repower," says Hays.

Areva's decision to stay also benefits Suzlon, giving it a breathing space. "It now has more time to organise a potential purchase of Areva's 30% at a later date." Suzlon's share price took a "hammering because of the huge cost outlay in connection with Repower," Hays points out, though it leapt on news of the phased approach to the Repower transaction, which requires minimal immediate cash outlay.

Areva's role in the new Suzlon/Repower partnership may still be short lived. "Areva will retain its stake in Repower for the time being," according to Repower's CEO, Fritz Vahrenholt. Commenting on the deal, Stefan Gäde, a wind analyst at HSH Nordbank, says: "It's difficult to predict what the three companies will achieve together. It's always difficult when three parties have to get on."

Gäde is far from certain that Repower has ended up in the best hands. "Suzlon is not a large player, we don't see any reference projects in Europe and don't know how good or bad they are. The company has arrived out of the blue; we've only seen them at a few trade fairs. Strategically speaking, it's not clear what Suzlon will bring in."

Areva, on the other hand, is an established world class player with great technological capabilities, says Gäde. "Despite its state owned background, if Areva's takeover bid had succeeded it would have followed GE and Siemens in rounding off its portfolio with a renewables technology just at the moment when it is becoming important," he adds. Areva had argued that it would bring financial strength, engineering expertise and commercial reach to Repower, particularly with a view to offshore development.

Suzlon's vision

Hays does not share Gäde's view. Suzlon's arrival is good for Repower, he says. "Repower needed greater economies of scale and there are benefits on the manufacturing side. As far as the supply chain and manufacturing costs go, there will definitely be a boost." Delayed component deliveries seriously hit Repower during the first quarter of 2007. It installed just 32 turbines (61 MW), half that achieved in the first three months of 2006.

Suzlon's chairman and managing director, Tulsi Tanti, does not doubt that the arrival of Suzlon can provide relief for Repower's hard pressed supply-line. "With our fully integrated value chain and integrated manufacturing capabilities, we will be able help set Repower on the road towards high growth with high margins," he says. Plans for adding component supply capacity "are well on track and will proceed according to plan."

Tanti declines to be drawn on whether Repower's need for gearboxes will be given priority at Hansen, Suzlon's gearbox manufacturing business in Belgium, which is also a major supplier to other wind turbine suppliers, including Vestas. "Hansen Transmission will honour its commitments to all its customers and stakeholders in the short and long term. While, Suzlon and Hansen will work together closely, Hansen will also continue to expand its market share and customer base and find new avenues for business growth independent of Suzlon," he says.

"It seems that Suzlon intends to manage Repower at arms' length for the next six to twelve months during which time it will not shift Repower's market focus, but may add in component supply capacity where needed," Hays concludes. Suzlon will also benefit from Repower's technical prowess, says Tanti.

Commercially, the companies complement one another. "This acquisition also solidifies Suzlon's reach across the world, and gives us an important gateway into the large and growing European market," says Tanti, with a particular eye on the offshore market. The company also has its sights on the Iberian Peninsula, central Europe and South America. While Suzlon has operations in Australia, Belgium, Brazil, Denmark, Germany, India, Italy, the Netherlands, New Zealand, Portugal, South Korea and the US, Repower's main markets outside Germany are France, the UK, Japan, and Portugal, with a toehold in Italy. Both companies are strong in China.

China

Through licence deals with China's two leading wind turbine suppliers, Goldwind and Dongfang Steam Turbine Works, Repower technology is already well established in a market tipped for huge growth. The next step is turbine manufacture. It owns 50.01% of Repower North China in Baotou, which it founded last year together with Chinese steel and machinery company North Heavy Industrial Corporation and British wind farm developer Honiton Energy (Windpower Monthly, October 2006). Next year it intends to install 100 Repower 2 MW turbines in China, using mainly Chinese components. Capacity at the factory is to double each year until 2010.

For its part, Suzlon recently opened a major facility in Tianjin, north China, with a manufacturing capacity of 600 MW a year (Windpower Monthly, May 2007).

To what extent the activities in both companies will be combined remains to be seen. "It is too early to comment on specifics," says Tanti. As Hays says: "Given the contrasting product and market focus of the two firms, a combined Suzlon and Repower entity will have different faces by region that will require significant management agility to organise."

Suzlon is stronger than Repower by far in both its home market and the US, but Repower has made steps into both markets in recent months. In India, it has a turbine manufacturing licence agreement with the Essar group, a steel, construction and power industry conglomerate, for its 1.5 MW machine and in the US it opened a sales and project management office in Portland, Oregon.

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