Macquarie Research reports on Suzlon Energy:

"With Areva’s recent move to remove the 50% acceptance condition from its offer for REpower without raising its target price, the deadline for both Areva’s and Suzlon’s offers for REpower (at €140ps and €150ps, respectively) has been extended to 4 May. Although uncertainty remains, it appears that the French elections could cloud Areva’s offer and that the bid price is levelling. We have spoken with Suzlon’s management since our last notes (Suzlon: three triggers for the stock, 7 March 2007, and Can this REpower Suzlon?, 12 Feb 2007), and we provide our updated view below."

Impact

"We cannot think of a better fit and reiterate our view that this deal is strategically very positive. The bid jump-starts Suzlon’s move into the European market, which still accounts for over half of the global market and is the only market in which Suzlon’s presence to-date is minimal. The deal, at €150, represents short-term financial pain: it is likely to be 14.5% EPS dilutive for FY3/08."

"Suzlon and REpower are the fastest and second-fastest-growing wind turbine companies in the top ten. We reiterate that they complement each other in three ways: Entry into Europe, especially Germany (the largest wind market in the world), France (one of the fastest-growing) and the UK, where REpower is strong; access to high-end 5MW turbines and REpower’s world-class R&D team; greater supply-chain leverage."

Synergies are real, but are there any downsides?

"Component shortage effects REpower has more than many of its peers, and relieving them would be positive for both top and bottom lines, enabling them to deliver real gains."

"Regarding product cannibalisation, we do not see much between Suzlon’s 2MW and REpower’s three 2MW products."

"Is the offshore market as exciting as it is made out to be? REpower’s cutting edge 5MW turbines, the largest commercial products in the world, are suited to the offshore market, which is expected to take off in 2010."

"Let’s look at the price again and at our updated EV per MW meter. At the current €150 per share, the deal is still DCF positive (about 7%), and our updated meter is showing USD 0.9 m per cumulative MW installed, which we regard as less than demanding given that REpower is a relative newcomer in the industry."

Key risks

"We see risk in expecting better margin improvements than are achievable. Our expectations are lower than those of Suzlon management given the following."

"Suzlon’s yet-to-be-proven ability to squeeze margins from its acquisitions."

"No listed firms other than Suzlon and Gamesa have achieved double-digit margins in recent years, and Repower has not since 2002."

Price catalyst
"12-month price target: Rs1,251based on a DCF methodology."

Catalyst:
"Continued globalisation and successful M&A implementation.

Action and recommendation
"Although the deal is mildly DCF positive, we have not included it in our valuation given Suzlon’s untested ability to improve margins and the remaining uncertainty about the bidding. maintain Neutral, with a target price of Rs1,251."