Larsen and Toubro Ltd. has decided to divest its electrical and automation business to Schneider Electric SE in an all-cash deal as the conglomerate continues to prune the number of business lines it operates across.
L&T entered into a definitive agreement with Schneider to sell the unit for Rs 14,000 crore, according to a stock exchange filing. The transaction includes all segments of L&T's electric and automation unit except marine switch gear and Servowatch Systems.
While the deal was struck between L&T and Schneider, the latter eventually wants to sell certain parts to Singapore’s Temasek Holdings Pte, S.N. Subrahmanyam, chief executive officer and managing director of L&T said in press conference. Schneider will own 65 percent of the unit while the remaining 35 percent will be held by Temasek, according to Bloomberg.
India's largest engineering conglomerate has been trimming its business lines as it seeks to streamline its focus on core verticals. “We feel this business did not fit into our long-range thinking,” Subrahmanyam told reporters at the conference. “We have been, over the years, moving into more infrastructure, construction, EPC, big product manufacturing and services. That would be core moving forward,” he added.
The over five-decade old electrical unit, which makes switchboards, energy meters and management systems, has manufacturing operations in India, the Middle East and Europe, according to its website. The division’s reported a net revenue of Rs 5,038 crore in financial year 2017. It contributes about 5 percent to L&T’s total sales.
Another reason to sell the E&A division was because L&T was losing its sheen. “We were dominant in this business. But over a period the dominance has been coming down,” Subrahmanyam said.
The transaction is subject to approvals from regulators and the Competition Commission of India. It would take about 12-24 months for these approvals to come in and the deal to conclude, the CEO said. Till then, the division will continue to be operated by L&T, he added.
The announcement is positive from "a sentiment perspective", according to Morgan Stanley's Girish Acchipalia. That's because it reiterates L&T's resolve in unlocking value while continuing to dominate the EPC space in India, he said in a research note.
Lokesh Garg, analyst at Credit Suisse, said the deal valuation is “value neutral verus our target price.” The transaction is strategically positive as the business is non-core with technology risk, Garg wrote while adding that the use of cash is key.
Subrahmanyam said that he doesn’t expect a major impact on L&T’s earnings from the transaction. The rationale behind keeping marine switch gear out from the deal was that Schneider didn’t want it and it is in congruence with L&T’s own marine defense business, he added.