State-run Cochin Shipyard Ltd has started preliminary discussions to buy a controlling stake in debt-ridden ABG Shipyard Ltd, two people close to the development said.
Shapoorji Pallonji and Co. Ltd, another contender, has decided to back out of the discussions, according to one of the two people. Both persons declined to be identified.
As on 30 September, lenders held a 50.46% stake in the company, according to ABG Shipyard’s latest shareholding data available on BSE.
A controlling stake in ABG may be valued at Rs400-500 crore, the second of the two people said. In the March quarter of 2016, the company had posted a loss of Rs1,710 crore and had an outstanding debt of Rs16,000 crore.
ABG Shipyard’s debt piled up because of a fall in freight rates and an industry slump. Its corporate debt restructuring (CDR) is among the largest loan recasts in India, second only to the Rs13,500 crore debt reorganization of engineering and construction firm Gammon India in July 2013.
Emails sent to Dhananjay L. Datar, executive director at ABG Shipyard, and Madhu S. Nair, chairman and managing director at Cochin Shipyard, on Friday were unanswered at the time of going to press.
A Shapoorji Pallonji spokesperson had in January denied that the firm had made a proposal for ABG Shipyard.
Reliance Defence and Engineering Ltd, Shapoorji Pallonji Group and Liberty House Group of UK had shown interest in buying out ABG Shipyard, even as its lenders try to force the ship maker out of a debt recast mechanism and recover their dues.
Even as the process of finding a strategic partner continues, the majority of lenders have decided to declare the company as a “failed exit” from the CDR cell, a Mint report dated 17 January said, citing an official from ABG’s lenders. A failed exit means the restructuring did not work, and the lenders could look at recovery options such as winding up the company or selling it to an asset reconstruction company (ARC).
“Collective decision-making among banks on restructuring cases is a challenge. Banks are currently doing distress sales. Instead, banks should look at stabilizing business, changing management, etc. But that would require capital and banks are not willing to put good money after bad assets. Hence, the best option available now is to go through bankruptcy law,” said Abizer Diwanji, partner and national leader of financial services at consulting firm EY.
ABG Shipyard’s lenders have been in talks with several strategic investors for a while. In April 2016, Mint had reported that lenders who had invoked the strategic debt restructuring (SDR) in ABG Shipyard in December 2015 were in talks with a Vietnamese financial investor.
In a similar case, lenders to Bharati Shipyard Ltd were unable to find a buyer and sold the business to Edelweiss Asset Reconstruction Co. in June 2014; the firm was later renamed Bharati Defence and Infrastructure Ltd to improve its focus on defence ships.
Cochin Shipyard competes with private-sector shipyards in the country—ABG Shipyard, Bharati Defence, Reliance Defence Engineering and L&T Shipbuilding Ltd.
Cochin Shipyard plans to file documents for its initial public offering with the markets regulator to raise about Rs600 crore as part of its effort to expand and construct larger vessels and also undertake ship repair and fabrication. In addition, the government will sell 10% of its stake through the IPO.
Cochin Shipyard has hired a consortium of investment banks, including SBI Capital Markets, JM Financial Institutional Securities Ltd and Edelweiss Financial Services Ltd,
Cochin Shipyard’s expansion plan involves building a new dry dock—the state-owned company’s third one—to build very large ships like capesize bulk carriers, general cargo ships, aframax and suezmax tankers, panamax and post-panamax container ships, LNG (liquefied natural gas) carriers, oil drilling rigs, semi-submersible rigs and better versions of aircraft carriers.