Is this passive profit for Schneider?

Schneider Electric, the global specialist in energy management, signed an agreement to acquire the assets of the DIGILINK business from Smartlink Network Systems. In a landmark deal inked in Mumbai recently, Smartlink sold their DIGILINK brand to Schneider Electric for Rs 503 crore. The DIGILINK brand comprises passive networking business including the manufacturing, marketing, and sale of structured cable products.

DIGILINK has 92 employees in its Mumbai HQ. It has a manufacturing unit and an R&D center in Goa along with sales and distribution offices across India. DIGILINK has a strong presence in retail, educational institutes, government, financial services, small office, and home office segments.

KR Naik, executive chairman, Smartlink said, "We are pleased to enter into this agreement as the transaction recognizes the value of DIGILINK's pre-eminent position in the structured cabling business including the strengths of the brand, the strong network, support and dedication of our distributors and last but not the least, a well qualified, capable and motivated workforce."

According to a company report, DIGILINK had sales of about Rs 155 crore for the year ended December 31, 2010 and is being sold on a slump sale basis to Schneider as a going concern. The transaction would primarily include the transfer of the 'DIGILINK' brand and trademarks, manufacturing facility at Goa, distribution network, and the employees related to the business. However, the DIGILINK brand name will remain unchanged. The company has agreed to a non-compete condition for a period of 5 years for the passive networking business, subject to shareholder approval and other customary conditions.

Regarding what Smartlink intends to do with the proceeds from this deal, Naik said that the company was in talks for investment and equity-sharing among the company shareholders. However, one of the primary areas of focus will be on building the Digisol brand in India.

With DIGILINK, Schneider Electric is well positioned to capture opportunities in the fast growing Indian network connectivity market as well as in other new economies, particularly in Asia Pacific and Middle East. The Group will be able to gain access to DIGILINK's well-established distribution network in the retail sector which complements its presence in the enterprise segments and will generate significant cross-selling opportunities for its power and IT products.

Thanks to the expertise of the foreign brand (Schneider), this acquisition stands for a lot more opportunities for channel partners because DIGILINK has been consistently growing at a rate of 15-20% per year and this figure can reach up to 20%, with Schneider's partnership. Schneider recently acquired US-based Lee Technologies, a leading services provider for data centers.

Olivier Blum, country president, Schneider Electric India said, "DIGILINK is one of the best companies for network connectivity in India-an area that we also specialize in. This is a very important move for Schneider and we plan to grow at 30% per year for the next 5 years, and expand the company size by 3-4 times by 2015. In the next 3 to 6 months, we will expand our products in the export market in APAC, exporting around 30-40% of our products by 2015."

Currently, DIGILINK has 3,000 retail outlets all over India. While the investment fits in well with the expected RoI, the objective of Schneider is to have India as one of the top four pillars of Schneider in the world. It seems obvious that for future acquisitions, Schneider is focused on the energy management space, which would also complement the company's green strategy. As a global specialist in energy management with operations in more than 100 countries, Schneider offers integrated solutions across multiple market segments, including leadership positions in energy and infrastructure, industrial processes, building automation, and data networks, as well as a broad presence in residential applications.

"DIGILINK not only gives us a very strong presence in retail where other Schneider Electric products could be distributed, but also in SoHo and education segments which is strongly complemented with the enterprise presence of Schneider. DIGILINK products will be also made available to international markets where Schneider benefits from a strong access to customers," summarized Blum.

Analysts say that it's a classic case of asset stripping, giving no visible gains for minority shareholders either in form of a special dividend or an open offer, while Smartlink got a good value for its brand. Besides, similar deals in the past have seen company's trade at much lower valuations, leaving not much return for investors.