Canadian investor Brookfield is set to buy the loss-making East West Pipeline Ltd (EWPL), earlier known as Reliance Gas Transportation Infrastructure Ltd, for an enterprise valuation of Rs 14,000 crore ($2 billion).
Brookfield is uniquely sponsoring an infrastructure investment trust (InvIT) called India Infrastructure Trust as the acquisition vehicle to take over the 1,400 km common carrier pipeline from Kakinada on the east coast to Bharuch in Gujarat.
The Competition Commission of India (CCI) approved the transaction last week. Brookfield has also filed an application with the Securities and Exchange Board of India (Sebi) for registering the InvIT, approval for which is expected this month, following which a formal joint announcement will be made, said multiple sources aware of the matter.
The pipeline housed under EWPL is being transferred to an entity called Pipeline Infrastructure Pvt Ltd (PIPL), a wholly owned subsidiary of Reliance Industries Holding Pvt. Ltd (RIHPL). That’s a holding arm of Mukesh Ambani and family, the promoters of Reliance Industries Ltd (RILNSE -1.25 %).
EWPL has already filed an application with the National Company Law Tribunal for the asset transfer.
The $2 billion will be evenly split between equity and debt and Brookfield is said to be currently in negotiations with Indian lenders such as ICICI BankNSE -1.20 % for financing.
Brookfield declined to comment. There was no response from Reliance to queries sent on Saturday.
JM Financial is advisor to the transaction. As part of the contract with Brookfield, Ambani is also said to be negotiating a clause that would allow buying back the asset after 20-25 years. But those terms are still getting finalised.
“It’s a great way of monetising an asset. Brookfield and the four other small sponsors of the trust will get cashflows from the pipeline, which will give them their desired yields,” said a Reliance executive on condition of anonymity. “InvITs are tax-efficient vehicles and give an optionality in the future to add more assets.”
DIRECT LINKS TO RIL BUSINESS
The pipeline, Sikka Ports & Terminals Ltd (SPTL) and Reliance Utilities and Power Pvt Ltd (RUPPL) are key companies in Ambani’s privately held RIHPL Group and their operations are critical for RIL as they are closely integrated with those of its facilities in Jamnagar, Dahej and Hazira in Gujarat, and with its Krishna-Godavari (KG) D6 gas fields. The facilities cater exclusively to RIL’s existing facilities as well as its expansion in the petrochemicals and refining business, which is nearing completion.
EWPL has built and operates the critical pipeline to transport natural gas produced by Reliance-BP from the KG basin on the east coast and links to users on the west coast. It also transports gas from other sources including RLNG (regasified liquefied natural gas) terminals along the stretch of the pipeline and is connected to pipelines of other operators such as state-run GAIL (India) Ltd and Gujarat State Petronet Ltd for onward delivery nationwide. However, the sharp drop in production in KG-D6 has had an impact on the company’s financials.
EWPL had operational revenue of Rs 884 crore and posted a net loss of Rs 715 crore in the year ended March. The company was bleeding due to high interest expenses, which were almost equal to its revenue, and depreciation costs. It had a total outstanding debt of Rs 13,715 crore as of March while its plant, property and equipment had an asset value of around Rs 11,000 crore, according to its last annual balance sheet. EWPL had separately disclosed in a regulatory filing that it was hiving off its investment division to immediate holding company Sikka Ports.
“EWPL’s cash flow is sensitive to the volume of gas available for transportation. Low volume reduces capacity utilisation and revenues, thus impacting cash accruals. There has been a significant drop in RIL’s gas production from its KG-D6 block over the last few years, which has constrained its cash flows,” said rating agency Crisil in a note earlier this year.
The average production was about 5 mmscmd (million metric standard cubic meter per day) in the third quarter of FY18, down from about 8 mmscmd in fiscal 2017 and about 12 mmscmd from fiscal 2014 to fiscal 2016, which in turn was significantly lower than 26 mmscmd in fiscal 2013. “Nevertheless, gas volumes are expected to increase after RIL and BP’s joint deepwater gas-field project at the KG-D6 basin commences production (expected in 2020),” the note added.
In five years since April 2012, RIHPL group has extended support to EWPL in the form of subordinated debt and preference shares of about Rs 4,826 crore and Rs 8,000 crore, respectively, as of March 31.
INDIA BETS
Surpassing heavyweights Carlyle, KKR or even Apollo, Brookfield, is the world’s second-biggest manager of alternative assets like real estate and private equity with $285 billion of assets, after Blackstone, which is number one. In India, it has already deployed over $5 billion since 2009-10, but once concluded, this will be its largest deal.
Brookfield’s India bets includes the largest commercial real estate transaction in India in 2014 — acquiring a 15 million square foot portfolio of office properties from Unitech. In the last two years, it has purchased a portfolio of six toll roads, totalling 246 km of roadways, and a majority stake in a cell phone tower network. Globally, it has been an aggressive investor in energy assets and related infrastructure — buying gas pipelines in Brazil, coal terminals in Australia and even gas stations in Canada.
Currently, through its active management, the firm manages over 2,200 km of backbone electricity transmission, 6.5 million direct customer electricity and natural gas connections, 980,000 smart meters, 2,000 km of regulated natural gas pipelines and 85 million tonnes per annum of coal handling capacity. Within its energy portfolio, its assets include one of the largest natural gas transmission and pipeline systems in the US, unregulated natural gas and liquid propane gas distribution operations in Australia; natural gas storage centers in Alberta and district heating and cooling systems in Australia, Canada and the US.
Source: Economic Times