Reliance Infratel IPO
Meanwhile, media reports suggest that Reliance Infratel IPO has also been cleared by SEBI. There is no official word on it yet, though. Reliance Communications holds 95 percent in Reliance Infratel and the rest is held by private equity investment companies, Fortress Capital, HSBC Principal Investments, Galleon Group, New Silk Route, GLG Partners, George Soros’s Quantum Fund and DA Capital.
Reliance Infratel will offer about 89.16 million of its shares, comprising 10.05 percent of its post-issue paid-up equity capital.

Government Rejects NTPC Issue
NTPC, India’s largest power producer, has received a set back as the Union Government has turned down the state owned undertaking’s proposal to raise nearly Rs 6,000 crore through follow-on public offering (FPO). “There was a proposal by NTPC to approach capital market but the finance ministry has rejected it last week,” Jairam Ramesh, Minister of State for Power, has been quoted as saying by PTI.
The FPO was to raise about Rs 6,00 crore for funding its expansion programme. The Government shareholding in NTPC stays at 89.5 per cent. NTPC was listed in 2004 to raise Rs 5,386 crore then. The power company has set an ambitious target to double its capacity to 50,000 MW by 2012 from 27,904 MW currently for which it plans an investment of Rs 88,000 crore. Now it remains to be seen how it will raise the capitl to fund its expansion.
The company also plans to venture into nuclear power manufacturing and power generation in the hydro sector.

Convertible Bonds
The company has also offered 425 million pound unsecured convertible bonds, due in 2011, to refinance its existing 550 million euro 1.375 per cent convertible bonds which mature on August 1, 2008, with an expected premium ranging between 25 per cent and 30 per cent. It is planning to use the net proceeds for general corporate purposes. Dresdner Kleinwort and Lehman Brothers are acting as joint bookrunners for the offer.

Valuation
Linen ‘n Things which operated 589 stores across US and Canada as of December’07 is closing 120 stores in the US as a part of its restructuring process. The board of directors of the firm has named financial restructuring expert Michael Gries as the interim CEO of the retailer. After the restructuring, the valuation of the company might actually be lower than what Apollo paid two years ago.
For the year ending December’07, the firm reported net sales of $2.79 billion which was down marginally by 0.9% compared to the previous year. Net loss of the firm, however, widened to $242.1 million compared to $154.4 million in 2006.
When Apollo bought the firm it had EBITDA of around $152 million which mean a deal with EBITDA multiple of around 8-9 times (deal value of $1.3 billion). But 2005-06 was the peak period for buyout firms and so were the valuations fixed quite aggressively.
On the one hand, the economic slowdown is affecting consumer spends in the US and the financial mess at Linens’n Things coupled with its losses would further dilutes its value. The EBITDA for FY’07 was in the red (-) $26.2 million as against $61.6 million in 2006. However, there are two big pluses going for the firm. Its brand value and its real estate assets.
If we average out the EBITDA for the last two years ~ $40 million and peg it on a 6-7 multiple, then its financial valuation could be around $300 million. With brand image and other assets added, the total value could be around $500 million.

GHCL: A Possible Buyer?
In the past, GHCL was ready to acquire a U.S.-based retail chain for around $200-400 million. It would be interesting to see if Apollo goes ahead with such a big writedown on its investments in Linens’n Things. Another option could be where GHCL acquires 50 per cent stake and lets Apollo continue as an investor.
This could be a probable scenario as GHCL itself is not sitting on a huge pile of cash. Many of its bets have not yielded big results. Though the acquisition deals it struck in 2005-06 period did bring it small sized firms at cheaper valuations, it could not capitalise on them for expanding as fast as it intended to do. At one point of time the management had indicated that they were looking at global revenues of $4 billion by 2008-09. But it is nowhere close to the $1 billion mark as of now.
However, the big carrot for Sanjay Dalmia would be that if GHCL snaps the firm it would become one of the world’s largest speciality home textile retailers. GHCL already operates close to 300 stores in the UK through Rosebys, the nations largest home textile retail chain, which it had acquired in 2006 for about $40 million. With Linens’n Things it would have another 460 odd stores which would make it a close second to Bed Bath & Beyond.
Incidentally, GHCL which is in the process of demerging its chemicals, home textile manufacturing and retailing business under three separate firms, had recently indicated plans to enter the US home textile retail market. One of the reasons for the demerger was to spin off retail into a separate global firm under Rosebys which could then raise funds for further expansion. Whether Linens’n Things is one of them is yet to be seen.
What could be a stumbling block for GHCL is funding. It has a market capitalisation of $200 million. The cash reserves are not sound and even the local markets are not conducive for an IPO even for a retail firm.
The other option could be a Special Purpose Vehicle (SPV) route to acquire either with some other PE fund or with Apollo retaining part of the stake.

Apollo’s Moves
Apollo has already shown interest in preserving its equity value in Linens’n Things. According to reports, Apollo has been buying Linens’ debt. By becoming a major bondholder and creditor, Apollo would have more say over the reorganisation plan, and could force a debt-to-equity swap enabling it to maintain its ownership.
This is an unusual thing for a buyout firm that is acquiring the distressed debt of a bankrupt company whose equity it already owns. Analysts are watching this space closely as increasingly more PE-backed companies end up bankrupt and the out-of-money fund managers might have to resort to such tactics.

Financial Re-engineering
Last week, Linens ‘n Things announced that it has received an interim court approval for $700 million debtor-in-possession financing that will allow the company to continue to operate during the court proceedings. The retailer has secured the finance from General Electric’s commercial finance arm which already has a $700 million line of revolving credit with Linens’n Things.

Other Suitors?
Bids for big names hardly go uncontested and Linens’n Things may not be different. There are some market rumours attaching names like Alok Industries’, Trident, S. Kumars and even Reliance Retail as probable suitors for Linens’n Things. The key could be the valuation — if it goes for a song, say $100-$200 million, all of these and many more could become likely buyout firms.

Markets Reacting
Last week, after reports the company might receive access to the funds, shares of PFC surged more than 10 percent. The company funds more than one-fifth of all power projects in India. PFC has also signed a loan agreement with Export-Import Bank of the United States for access to a $800 million facility to fund a project related imports from the US in the next two years.
Power Finance Corporation’s net profit rose 22.37 per cent to Rs 1206.76 crore on 28.32 per cent rise in total income to Rs 5040.04 crore in the year ended March 2008 over the year ended March 2007.
As part of its long-term plan to emerge as an equity investor in power projects, PFC has entered financial advisory services business.

Impact on Mphasis
EDS held 60.9 per cent stake in Mphasis as on March 31 this year and it would go to HP after the deal. It is being reckoned that the shareholders of domestic IT firm Mphasis could soon see another open offer being made to them. According to SEBI guidelines, it is mandatory for a firm acquiring over 15 per cent stake in any company to make an open offer to public shareholders of that company
for an additional 20 per cent stake. In 2006, Baring India Investment Ltd sold its entire stake of 34.73 per cent in Mphasis BFL Ltd to EDS in an open offer.
“It will still take another 2-3 years for the two companies to consolidate their staff and strength. So there will be no immediate impact on Mphasis as such”, a senior research analyst tracking the deal with a Mumbai based broking firm said. Shares of Mphasis on Wednesday surged 10 per cent and settled at Rs 242.45 on the Bombay Stock Exchange. The scrip recorded intra-day high of Rs 256 and over 11.09 lakh shares were traded on the bourse.

Recession-driven Buys
A recessionary climate acts as a conducive factor for cheap buys. As the largest high-tech acquisition so far this year, HP’s $25-per-share purchase of Plano, Texas-based EDS may also wake up other high-tech companies to the compelling values to be added since stock prices are low, analysts said. In a recession-driven economy, the reality is that many of these properties are pretty cheap.
Larger buyouts that emphasise acquiring people become particularly attractive, because a soft job market makes it more likely the target’s employees would stay, minimizing one key integration challenge.
“Recently, 3i Infotech group acquired the US based Regulus Group for $80 million, and Regulus is half as big a company as 3i Infotetech itself. Regulus reported revenue of approximately $148 million for the 12 months ended December 2007. Certainly, a recessionary climate acts as a conducive factor for
such buys.”
Coming close on the heels of Microsoft Corp.’s abandoned $47.5 billion bid for Yahoo! Inc., this message about the values in the high-tech sector resonates.