Wednesday, January 16, 2008

Blackstone hoping smaller deal with Eenadu group will clear stubborn roadblocks

In an attempt to try and jump over the obstacles that have thwarted India’s largest private equity media investment, Blackstone Group has sought to bring down the size of its proposed investment in Ushodaya Enterprises Ltd, publisher of the largest selling Telugu daily Eenadu.

Initially, Blackstone proposed to invest $275 million, or about Rs1,080 crore, in Ushodaya, for a 26% stake. But with its proposal stuck for about 10 months now, it has informed the Foreign Investment Promotion Board, or FIPB, the committee of bureaucrats that oversees foreign direct investment proposals, that it will scale back the investment to under Rs600 crore, which would work out to about 14% of Ushodaya’s equity.

People familiar with the matter confirmed on Tuesday that Blackstone had indeed proposed the new plan to try and avoid more delays that might arise—if FIPB again recommends the original deal to the finance ministry —because the level of investment would have required the proposal to then clear the finance minister as well as the Cabinet Committee on Economic Affairs.

Ramoji Rao and his Hindu Undivided Family own a 99.86% stake in Ushodaya. It is possible that if the new proposal is approved, another smaller proposal could also be made by Blackstone, which would also be under Rs600 crore. It is unclear if Ushodaya will make the second investment opportunity available to Blackstone.

An investment proposal that doesn’t exceed Rs600 crore only needs to be signed off at the end by finance minister P. Chidambaram. Blackstone’s plans to reduce its investment were first reported by Business Standard on 8 January.

The saga of Blackstone’s 10-month-long unsuccessful attempt to get FIPB clearance against the backdrop of a rivalry between Rao and the Y.S. Rajasekhara Reddy-led Congress government in Andhra Pradesh.

Leading the campaign against the deal was Congress member of Parliament from Rajahmundry, Aruna Kumar Vundavalli, who has repeatedly asked FIPB to not allow the transaction, citing problems at Margadarsi Financiers, a company owned by Rao and his family, which needs to repay public deposits as part of an agreement with the Reserve Bank of India.

Rao and his family had proposed to repay the money by selling intangible and tangible assets to Ushodaya, including a film library, valued by Ernst and Young at Rs770 crore; printing presses from another Rao company; and agreeing to a non-compete with Ushodaya. In turn, Ushodaya, acting as a separate legal entity, was to use the proceeds from Blackstone to pay Rao and his family.

The AP government has already asked the Supreme Court to not allow sale of any companies related to Rao and Margadarsi. That hearing is scheduled for early February.
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