Blackstone builds on investments in India

The buyout firm announces its second India deal in a fortnight, investing $150 million for a 14.5% stake in Nagarjuna Construction.
Blackstone has accelerated the pace of investing in India with the $150 million purchase of a stake in Nagarjuna Construction following close on the heels of its Gokaldas deal.

Blackstone will own 14.5% of Hyderabad-based Nagarjuna Construction. The stake is being acquired via a fresh issue of shares and warrants. Blackstone will be allotted 20,246,900 equity shares at a face value of Rs2 ($.05) each and a premium of Rs200.50. This adds up to $100 million and represents a 12.5% equity stake. Blackstone will also be issued 9,111,111 warrants, with the strike price for each warrant set at Rs225, representing another 2% stake assuming all warrants are exercised. The warrants, which aggregate $50 million, have an exercise period of 18 months. SSKI acted as advisor to Blackstone.

The founders of Nagarjuna, the Raju family, currently own 26% of the company. After the deal, the family's stake will fall to 24%.

Along with the investment, Blackstone has negotiated the right to nominate one director to the board of Nagarjuna. Nagarjuna shares traded around the Rs200 level on August 28.

ôThe investment by Blackstone in Nagarjuna, following soon after the investment by the US firm in Gokaldas, reflects the large opportunity for private equity players to invest in mid-sized companies with strong management teams and participate in their growth story,ö says Devyani Khanvilkar, associate director at Kotak Investment Banking.

Kotak Investment Banking was advisor to Nagarjuna. This deal follows just days after BlackstoneÆs $165 million investment in Gokaldas Exports, which Kotak also advised on. The Gokaldas deal was announced on August 20.

For the latest fiscal year ended March 31, 2007, Nagarjuna Construction had a turnover of Rs29 billion, up 57% over the previous year. On this, it earned a net profit of Rs1.5 billion, up 46% over the previous year. This translated into earnings per share of Rs7.35.

Nagarjuna is confident of continuing on its growth trajectory and is targeting a 38% rise in turnover during the current fiscal year to Rs40 billion.

Nagarjuna is a construction services company operating in the roads, water, buildings, electrical works, irrigation, power, oil and gas and metals segments. It also owns infrastructure assets, which it constructs on a build-operate-transfer (BOT) basis. It will deploy the funds invested by Blackstone for additional investments in public-private infrastructure projects and to shore up capital to enable it to bid for larger projects.

Infrastructure creation is a pressing need of India. Akhil Gupta, chairman and managing director of Blackstone India, highlighted this aspect in a written statement regarding the Nagarjuna deal, saying: ôWe believe that planned infrastructure expenditure, economic growth and urbanisation will drive long-term growth in IndiaÆs construction sector.ö

Investment in infrastructure in India is currently around 4.6% of GDP and experts say this needs to increase to around 8% of GDP to bridge the existing infrastructure deficit. A study earlier this year estimated that this translates to around $475 million of spending and suggested government resources could be insufficient for the entire amount. Hence, public-private partnerships are being proposed to meet the gap.

As for Kotak, it is earning itself a name - and no doubt healthy fees - with the private equity placements it is executing for its clients. ôKotak has effectively moved in on the segment comprising mid-market Indian companies,ö comments a banker. ôMany of these companies do not meet the minimum size or fee criteria of the Wall Street firms.ö

Their size does not however prevent these companies from thinking big and this category of companies is hungry for capital to fuel growth plans. Kotak has obviously scouted the market well.
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