Hindenburg Effect: Adani Maps Comeback Strategy After $132 Billion Rout

Almost a month after a bombshell short seller report lopped off $132 billion in market value from Gautam Adani’s empire, the Indian billionaire has hired top-shelf US crisis communication and legal teams, scrapped a $850 million coal plant purchase, reined in expenses, repaid some debt and promises to repay more.

The ports-to-power conglomerate helmed by Adani — who used to be Asia’s richest person — is hoping to claw back the narrative with this playbook and calm jittery investors and lenders after US-based Hindenburg Research on Jan. 24 accused it of accounting fraud, stock manipulation and other corporate governance lapses. The Adani Group denies these allegations.

Adani and his aides have been in damage repair mode ever since. Besides a campaign to portray themselves as responsible borrowers with prepayments and on-time payments of debt, executives have also kicked off a series of meetings to pacify overseas bondholders, who were tapped by the tycoon for more than $8 billion funding in recent years.

Reflecting the group’s realization of the severity of the hit to its image, it has brought in Kekst CNC as a global communications advisor, Bloomberg News reported Feb. 11. The public relations firm co-headquartered in New York and Munich is known for its work with other corporate blow-ups in recent years, like WeWork Inc.’s valuation implosion in 2019.

Kekst’s mandate is to help the group regain investor trust by laying out the proper context, not just on the Hindenburg allegations but other concerns that have swirled around the fundamental strength of the business, a person familiar with the matter said.

Kekst is working with Adani’s C-suite and communications team, and could put them through a “situation room” — the firm’s term for a simulated crisis in which executives are bombarded with tweets, calls from journalists and other stressful developments, said the person, who asked not to be named as they’re not authorized to speak publicly.

The Adani Group has also engaged American law firm Wachtell, Lipton, Rosen & Katz to fight back against the short seller’s claims, the Financial Times reported citing unnamed sources. Wachtell is one of the most expensive US law firms and has experience in defending clients facing attacks by shareholder activists.

A spokesperson for Adani Group didn’t immediately respond to a request for comment. Kekst declined to comment, while Wachtell didn’t respond to requests to comment.

‘Lingering Questions’

The moves show that “Adani, even after the stock market bloodbath, can still afford good lawyers,” said Bhaskar Chakravorti, the dean of global business at Tufts University’s Fletcher School. “As a global investor, I would still have lingering questions.”

His comments reflect how the saga has grown beyond the group to cast a shadow on India’s ability to rival China as an investment destination, sparking speculation from billionaire investor George Soros that it might even spur a “democratic revival” in the country. Adani is perceived to be close to Prime Minister Narendra Modi, who has not directly addressed the issue, but has lashed out at opposition parties who have called into question his relationship with the billionaire by highlighting their own past corruption scandals.

Narrative aside, investors say they’re watching two things: the group’s high leverage ratios and its ability to generate cashflow after losing $2.5 billion in fresh funds from its withdrawn share sale.

Adani management has been making steps to address these concerns. They told bondholders on a call Thursday that the goal is to cut the group’s ratio of net debt to Ebitda to below three times next year, from the current 3.2 times, Bloomberg reported citing people familiar with the matter.

Adani Power Ltd. has also called off a plan to acquire a coal plant project by DB Power Ltd. in central India, as part of the group’s overall effort to curtail capital expenditure and conserve cash.

Observers say more such moves may be required to turn the crisis around.

The group has some “some very valuable assets” that generate cashflow, said Trinh Nguyen, a senior economist at Natixis SA in Hong Kong. “Should they want to, they can sell these assets and can find buyers.”

Repaying and prepaying of borrowings, both by the conglomerates’ units and the Adani family themselves, have featured in the push to convince investors that the group does not face any liquidity or solvency issues despite its market value being cut in half.

The tycoon and his family prepaid $1.11 billion worth of borrowings on Feb. 6 to retrieve pledged shares in three Adani Group firms.

The ports unit announced plans on Feb. 8 to repay 50 billion rupees debt in the year starting April. The conglomerate also plans to prepay a $500 million bridge loan due next month after some banks balked at refinancing the debt, Bloomberg News reported.

“The current market volatility is temporary,” the tycoon said in the earnings statement of Adani Enterprises Ltd., the group’s flagship firm, which he said “will continue to work with the twin objectives of moderate leverage and looking at strategic opportunities to expand and grow.”

The conglomerate is now choosing slow and steady growth over the breakneck, mostly debt-fueled, expansion spree of recent years. The Adani Group has rapidly diversified from its ports and coal-based businesses to airports, green energy, data centers, cement, digital services and media.

Global Audit

It remains to be seen if the new strategy will convince investors to move past the Hindenburg report, or if the short seller’s allegations will continue to dog the tycoon. The conglomerate has been noticeably reluctant to address calls for independent investigation into the claims of corporate malfeasance and lack of regulatory compliance.

In recent earnings filings, Adani-owned Ambuja Cements Ltd. and Adani Green Energy said the group is considering hiring independent firms to look into the issues of regulatory compliance around related party transactions and internal controls, but no firm announcements have been made so far.

Confirming a top-shelf global auditor would be “a positive move,” Chakravorti said, though it “doesn’t sound like a top-to-down thorough opening of the books.”

The tycoon also plans to appoint a financial controller to oversee his various trusts and privately-held companies, the Financial Times reported citing unnamed sources.

For now, Adani appears to be getting some reprieve from market losses after MSCI Inc. said it’ll postpone implementation of free float updates to the May index review. Any index cuts by MSCI of Adani Group shares can affect funds holding $15 billion, Rebecca Sin, a senior analyst at Bloomberg Intelligence, wrote in a report Thursday.

In the long term, it will need to reckon with a reality in which its core growth strategy — rapid expansion through cheap debt — is no longer within reach.

The surge in borrowing costs for the company’s units in particular comes on the heels of the end of the global era of cheap funding, which the conglomerate took full advantage of.

“I don’t see it as a cakewalk but they seem pretty confident they can clear the debt obligations,” said Kranthi Bathini, chief market strategist at Mumbai-based WealthMills Securities Pvt. “We need to see how they refinance their debt.”