M & A CritiqueAnil Ambani-controlled Reliance Power plans to acquire the entire hydroelectricity portfolio of the Jaiprakash Group and has signed an initial agreement for India’s biggest deal in the infrastructure sector other than telecom. Anil Ambani quickly moved in for his first big ticket acquisition, beating others such as the Adani Group and JSW, to sign an exclusive MoU for taking control of the country’s biggest private portfolio of hydro projects, after the Abu Dhabi National Energy Co (TAQA) pulled out of a $1.6-billion deal to buy two of the three hydroelectric power plants of Jaiprakash Power Ventures. On 25 July, Noida-based Jaiprakash Power announced that TAQA had backed out of a deal struck in March to acquire two of its hydropower assets at an enterprise value of $1.6 billion citing changes in business strategy. In this article, we have tried to analyze the Reliance-JP deal.
The Deal :
An MoU was signed between Reliance CleanGen Ltd. (RCL), a 100% subsidiary of Reliance Power Ltd. (part of the Anil Ambani led Reliance Group), and Jaiprakash Power Ventures Ltd. (JPVL), a subsidiary of Jaiprakash Associates Ltd. (JAL), for the 100% acquisition by RCL of the entire hydroelectric power portfolio of JPVL.
JPVL’s hydroelectric power portfolio has an aggregate capacity of nearly 1,800 MW, fully in operation, the largest in the private sector in India, and with an asset base of over Rs. 100Bn. The portfolio comprises of 3 plants, with an asset life of over 50 years, each using run-of-the-river technology to convert natural water flow to electricity, eliminating the need for a large reservoir.
The completion of the proposed Transaction would make Reliance Power the largest provider of hydroelectric power in the private sector in India. In addition to the assets contemplated to be acquired under the proposed Transaction, Reliance Power has hydroelectric power projects aggregating over 5,000 MW under development, of which 4,200 MW are located in Arunachal Pradesh, 700 MW in Himachal Pradesh and 400 MW in Uttarakhand.
Summary of Assets being acquired from JPVL:
Plant Capacity (MW) Location Power Off-takers
Baspa Stage II 300 Kinnaur District,
Himachal Pradesh
(within 2 kilometers
of each other and
sharing support
facilities). Himachal Pradesh
Karcham Wangtoo 1091 Rajasthan, Uttar
Pradesh, Haryana,
Punjab (Through
PTC), Himachal
Pradesh
Vishnuprayag 400 Chamoli District,
Uttarakhand Uttar Pradesh,
Uttarakhand
Deal Consideration :
The deal size is not yet announced though JP Group Executive Chairman Manoj Gaur in an interview has said that Reliance Power will buy all hydro assets at an Enterprise Value (EV) of INR 123Bn, which was subject to certain adjustments working capital etc, which is something that will be firmed up after the due diligence. The equity and debt components of the deal have not yet been decided.
Market buzz has it that the enterprise value of the deal is around INR 123 Bn. If that is the case, R-Power is getting 1800 megawatts (MW) of hydel assets at approx INR 68.3 Mn per MW. That is truly a win considering that it takes about INR 80 Mn per MW to set up new hydropower generating facilities with assorted headaches such as getting land, environmental clearances and so on.
Is Reliance paying too much?
This is R Power’s first acquisition; all its other projects, including the Sasan ultra mega power plant, Rosa and a clutch of hydroelectric plants in the northeast, are being developed in-house. At around INR 68.3 Mn per MW, is R Power paying too much? Not really. All three projects are run of the river, which means there are no large, costly reservoirs to maintain. The variable cost of running these plants is close to zero, as the only fuel to generate electricity is the kinetic energy of flowing water. And complete projects mean almost zero capital cost. Most of R Power’s earlier projects are almost complete, which makes this deal bankable. Each of the acquired plants has an estimated lifespan of 50 years, which means that after a few years of paying off borrowing costs, they will generate unencumbered cash for decades to come.
The Math behind the acquisition :
R-Power has around INR 26Bn cash on its books. Its debt-to-equity ratio is also a comfortable 1.35 times at the end of March, giving it leeway to raise more loans. Assuming it has to raise INR 100Bn loans (part of this would be no more than assuming existing Jaiprakash debt associated with these three plants or refinancing it), the debt-equity ratio rises to 1.86 times, a still comfortable level. While it could also raise equity, there are competing demands as well from other projects which have a significant amount of capital sunk in them and are stuck at various levels of implementation. R-Power could opt for a structure similar to TAQA’s and bring in private equity or strategic investors in the subsidiary, which would buy the hydroelectric plants. But clarity on these details will emerge only in time.
There have been reports suggesting that Reliance Power Limited is in talks with Temasek Holdings, a Singapore Govt. investment arm and other marquee global pension and infrastructure focused funds to finance the large acquisition. Reliance is seeking to raise $500 Mn (INR 30,000 Mn) from Singapore government’s investment arm. Other funds that been sought to fund the INR 123 Bn deal include Canadian pension fund giant PSP Investments and homegrown PE firm IDFC Alternatives, part of infrastructure finance company IDFC, which was also part of the Tata led consortium. As per reports Reliance would not raise equity through RPower but offer minority stakes in subsidiary Reliance CleanGen Ltd. (RCL), through which the acquisition was made, retaining a majority of 51%. It seeks to raise INR 95 Bn in debt on the back of cash flows that the assets have already generated to the tune of INR 8000 Mn last fiscal and the remaining in the form of equity.
R-Power is also looking to raise long term 10, 15 and 20-year money from a consortium of three Chinese banks, including China Development Bank (CDB) and Bank of China, to largely refinance the high-cost project debt that Jaypee had taken from Indian banking and financial institutions.
The Companies at a Glance :
Reliance Power Limited, part of the Reliance Group, is India’s leading private sector Power Generation Company, with Net Worth of nearly Rs. 200 Bn, Market Capitalization of – INR 250 Bn, and the largest family of – 4 million shareholders, the largest shareholder family in India. The company has the largest portfolio of power projects in the private sector in India, based on coal, gas, hydro and renewable energy, with an operating portfolio of 4,525 MW. The company also has the largest captive coal reserves in the private sector in India, estimated at 2 billion tonnes. Besides, the company is developing 3 coal mines in Indonesia with an estimated resource potential of nearly 2 billion tonnes and is also developing Coal Bed Methane blocks.
The Reliance Group is one of the top private sector business houses in India across all major financial parameters, with assets in excess of Rs. 2500 billion, Net Worth of over Rs. 900 Bn, and operating profits of over Rs. 120 Bn. Across different companies, the Group has a customer base of over 200 million, the largest in India, and a shareholder base of over 8 million, among the largest in the world. Through its products and services, the Reliance Group touches the life of 1 in 6 Indians every single day. The Group’s activities span Communications, Power Generation, Transmission & Distribution, Coal Resources, Cement, EPC, Urban Transport, Financial Services and Media & Entertainment.
Jaiprakash Power Ventures Ltd currently owns and operates 2,291 MW of power capacity, which includes 1,791 MW of hydro capacity and 500 MW of thermal capacity. With the ongoing commissioning of its 1,320 MW Nigrie Thermal Power Plant in MP, and upon completion of the 1,980 MW Bara Thermal Power Plant in UP, it will have a generation base of 5,500 MW.
Jaypee Group with its three listed companies (Jaiprakash Associates Ltd, Jaiprakash Power Ventures Ltd, and Jaypee Infratech Ltd) is well known for its execution skills. The Group has developed India’s iconic infrastructure projects such as 1,091 MW Karcham Wangtoo Hydro Electric Plant, India’s largest hydropower plant in operation in the Private Sector; 165 Km long, 6 lane access controlled Yamuna Expressway connecting NCR to Agra, the largest private sector investment in the road sector, and the globally known F1 circuit in Greater Noida, Uttar Pradesh. Jaypee Group has a consolidated net worth of over INR. 200 Bn, and consolidated revenues of INR. 230Bn in FY 14.
What the deal spells for Reliance and JAL?
The deal has been termed as the largest merger and acquisition deal in the country’s power sector, based on the generation capacity and size of the assets being acquired.
Reliance :
● Reliance Power has its own hydroelectric power projects aggregating over 5,000 MW, however, all under development. On the other hand, JPVL, which was the largest hydropower operator in the private sector, has all operational assets.
● The deal, on completion, will make Reliance Power the largest generator of hydropower in the private sector, with 7,800 MW operating capacity by the end of 2015 fiscal.
● The deal will give Reliance one of the best operational hydro assets in the country.
● The acquisition will help Reliance Power diversify its largely coal-based portfolio.
● The deal will add assets which help Reliance Power boost its earnings per share and return on equity Reliance ADAG group’s EPC capabilities will improve as a result of the deal, as 2,800 employees of the three hydro projects will join Reliance Power.
JP Associates :
● The deal solves the near-term cash flow issue for the Company.
● JP intends to utilize the entire proceeds of the proposed transaction to reduce its outstanding debt and thereby deleverage its Consolidated Balance Sheet.
● JP will be able to meet its debt obligation and finance its projects under implementation.
● The deal would help JP group achieve its target of trimming its debt by INR 150 Bn by the end of the current fiscal which is estimated to be over INR 500 Bn.
The Other Side of the Coin :
The deal which values JP Ventures’ power assets at over Rs.100 Bn, will speed up the deleveraging of parent JP Associates’ consolidated balance sheet. JP Associates had earlier sold its cement division to UltraTech Cement at a value of over Rs. 38 Bn. Also earlier this month it also raised about Rs.14.99 Bn through the qualified institutional placement route. The company which had a debt-to-equity ratio of close to six times as on March 31, may be able to lighten the debt and reduce the ratio to five times, still much higher than the comfort level of two times. However, this deal will also deprive JP Ventures of a sizable portion of its current revenues and cash flows. The deal comprises of three hydropower projects which generated revenues of about Rs.19 Bn out of the company’s total revenues of Rs.24.59 Bn in 2012-13. After the asset sale, JP Ventures will only be left with operating a coal-based capacity of 500 MW until it commissions the first 600 MW of its Nigrie Super Thermal Power Project (1,320 MW) by August.
Market Reaction :
The deal is seen as positive for both the companies, and it was reflected in the price movement of their scrips. Though looking at the market reaction, JP Power seems to be benefiting more from the deal. The stock had moved higher by nearly 8.2 percent in the first hour of a trading post the deal announcement, while Reliance Power had moved higher by only three per cent. It is natural that JP Power would move higher since it will be getting much-needed cash in its hands.
Conclusion :
The deal on a prima facie level appears to be a win-win for both Reliance and JP. But it also needs to be considered that on one hand, the deal is taking care of JP Group’s outstanding debts it also could deprive JP Group of its cash generating assets. In the case of Reliance, the investors are happy that the company is buying assets which generate about Rs.800 crore cash flows annually, earn a regular return on equity and would add to R-Power’s earnings per share from day one. But they should not get carried away, given that other problems for R-Power such as regulatory and fuel availability issues still persist.
