beyondbrics

Why would a profit-making company sell a part of its business that provides 90 per cent of its revenues? Because the company’s majority stakeholder is extremely bullish on a new growth segment.

Smartlink Network Systems of Mumbai sold its structured cabling business to Schneider Electric India, a fully-owned subsidiary of the French electrical equipment maker, for $112m in an all cash deal on Thursday. The DigiLink business earned $34.7m in the calendar year 2010, 90 per cent of Smartlink’s revenues.

But K R Naik, Smartlink’s executive chairman and largest majority shareholder, says the sale has allowed his company to get out of a slumping business and will provide the cash needed to invest in its most promising segments: active networking products under its new brand, DigiSol, and after-sales services and support under its DigiCare brand.

“DigiSol is our next thing which in less than one year has become number two. [...] Now this will be our real growth,” Naik said in an interview with CNBC India.

Naik insisted that he had made no money from the sale and that all its proceeds would be ploughed back into the business.

Analysts remain sceptical, however. Although Smartlink sold its core business it did not sell any of its own shares – so there will be no open offer to minority shareholders. Also on CNBC, Aashish Tater of Fort Share Broking said he had downgraded Smartlink as a result of the sale.

Smartlink’s shares rose sharply on Wednesday before the sale was announced, only to slump after the news and then recover on Friday (see chart above).

For Schneider electric, the opportunity allows expansion in the Indian retail and enterprise sectors.

Olivier Blum, country president at Schneider, said:

By combining the strengths of the two companies, we are creating a leadership position in the fast growing network connectivity market in India. 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 in which it complements our enterprise presence. We will also distribute Digilink products in the international markets.

The French electrical equipment maker is seeking expansion in India, after listing the south Asian country as one of its top five growth markets last year. In the past year alone, it has made four acquisitions in the country, with the acquisition of Zicom’s security business for $57m in March 2010 being one of the biggest.

Schneider globally reported revenues worth $28bn in 2010 with Asia Pacific revenues at $2bn. It is also reported to be in talks with Delhi-based Luminous power, the power back-up company.

India’s shortage of electricity and backbone infrastructure continues to present lucrative opportunities for those seeking growth in the market.