India’s State-Run IFCI Cancels Sale of 26% Stake

From Staff Reports

State-run lender Industrial Finance Corp. of India Ltd. has shelved its proposed sale of a 26% stake, for which a consortium consisting of Morgan Stanley (MS) and Sterlite Industries of India Ltd. (SLT) had emerged as the lead bidder.

“As the financial proposal submitted by the Sterlite Industries-led consortium was conditional, the board of directors of the company… has unanimously decided that the conditional offer is not accepted,” IFCI said in a note to the Bombay Stock Exchange last week.

According to a report, the board additionally has decided to not reopen the bidding process. Media reports had circulated stating that IFCI wanted to take the Sterlite-Morgan Stanley team on as an outside investor, but without giving the two-company consortium any say in how IFCI is run.

“It is not so much an issue of management control as it is the fact that they wanted to give the stake to any bidder apart from an industrial house,” money manager R. K. Gupta told Forbes.

Gupta’s Taurus Asset Management fund controls approximately $160 million, including an estimated 200,000 shares of IFCI.

As Gupta noted, had an existing bank or financial institution made a bid, the response from IFCI could likely have been very different.

But Sterlite is a mining company. And if it had taken a stake in IFCI, experts believe it would then have applied for a banking license. And since the government doesn’t grant such licenses to other big industrial groups, it couldn’t very well do so for Sterlite, Gupta theorized.

Dhanpal Jhaveri, a spokesman at Sterlite’s parent company, Vedanta Resources PLC (PINK: VDNRF), told journalists that the company “gave [its] best bid to achieve the objectives set out by IFCI for inviting a strategic partner.”

It was back in July that IFCI announced it wanted to sell its stake. That drew interest from such high-powered players as Goldman Sachs Group Inc. (GS), U.S. venture-capitalist The Blackstone Group LP (BX), and billionaire and noted “vulture investor” Wilbur Ross.

Unfortunately, IFCI shares soared in recent months, significantly boosting the stock’s valuation, and prompting potential suitors to drop out, feeling the stock was “too rich.”

The Sterlite-Morgan Stanley team was one of the three final bidders.

Last Tuesday, IFCI opted to issue slightly less than 123.8 million new shares to public-sector banks and financial institutions at a rate of $2.71 [107 Indian rupees] per share. The stock – which had been up 8% so far in the New Year – dropped 7% Tuesday due to investor uncertainty created by the sale.

At any price under $1.89 per share (about 75 rupees), the stock would be a good buy, Gupta says. Thanks to that stock sale to banks, IFCI’s net worth is much-improved, and it’s also recently seen a major turnabout in the area of non-performing assets. That will translate into better financial results over the next year.

One other bit of good news looms: The International Finance Corp., a unit of the World Bank, early last month said it was considering taking a 10% stake in IFCI, Gupta said.

IFCI was set up back in 1948 as India’s first development-finance institution. Back in 2003, India’s government bailed out IFCI, whose financial situation had become very tenuous due to bad-debt problems. The government is due a $330 million payment next year as recompense for that bailout package.

IFCI’s financial performance has improved as it found itself able to recover previously non-performing assets in such sectors as sugar, steel and textiles, analysts told For the quarter that ended in September, IFCI said net income jumped fourfold, reaching $125.8 million.

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