Qatar Investment Authority is in negotiations with the Adani Group to buy a minority stake in the latter’s flagship power transmission and distribution asset — Adani Electricity Mumbai Limited (AEML). The 14-year-old sovereign wealth fund of the oil-rich Gulf nation could invest as much as Rs 3,000-4,000 crore for a minority stake of 20-25% in the business, said people in the know.
Adani Electricity Mumbai Limited, the country’s largest private sector integrated power utility, is a wholly owned subsidiary of Adani Transmission. In August 2018, Anil Ambani sold his Mumbai power distribution business to Adani Transmission Ltd (ATL) for Rs 12,700 crore, allowing the latter to enter the discom business. Subsequently, the Mumbai business got housed under a dropdown subsidiary.
The acquisition was financed by a Rs 8,500 crore of term debt from a consortium of banks led by State Bank of India, Yes BankNSE 7.76 % and ICICI Bank.
Deal’s Final Contours in Works
The funds are likely to help provide growth equity to the business and also deleverage the balance sheet. The company has also earmarked a capex of Rs 1,200 crore for maintenance, upgrade of its existing distribution network and capital addition. The final contours of the transaction are still being worked out. But there is no certainty that the negotiations will fructify and result in a deal.
An Adani spokesperson declined to comment on speculations. Emails sent to QIA did not elicit a response till press time. Several analysts had felt that the Mumbai acquisition was a richly valued one when it got announced and so an equity raise will be seen as a positive catalyst. “The Mumbai discom acquisition is excessively expensive at a 3x P/BV. This M&A translates to just 6.4% ROE for ATL, way below its cost of perpetual debt at 11.8% from promoters, leading to a negative spread,” Bharat Parekh, an analyst with CLSA had said last November after the deal was completed.
Though the business has been stable with recurring cash flows, Varun Ahuja of JP Morgan said in a report in May that “while capex guidance is higher, the additional cash flows from incremental operating assets and also from the Mumbai distribution asset enhance overall cash flows to keep credit metrics stable”. He also said that key credit driver in the near term remains equity market tap for replacing some of the subordinated perpetual instrument into common equity.
Even as a group, Adanis have looking at strategic partnerships across gas distribution, petrochemicals, renewables with marquee players like Total, BASF to de-risk its portfolio. “This will be more of financial investment with a reputed sovereign wealth fund that also has operational expertise in infrastructure, especially power sector,” said a long-time Adani Group observer on the condition of anonymity. Adani is already in advanced negotiations with Total SA for selling around 30% stake in his city gas distribution company Adani Gas for around Rs 5,500 crore.
The move that will eventually see the French energy giant become an equal equity partner in the company along with promoter Gautam Adani. Interestingly, QIA is also an investor in Total SA.
TURNAROUND POST TAKEOVER
AEML’s integrated business of power generation, transmission and retail electricity distribution serves over three million consumers spread across 400 sq kms in Mumbai and its suburbs, meeting close to 2,000 mw of power demand. Following the takeover, the company witnessed the lowest distribution loss in FY19 at 7.85%, down from 8.12% in FY18. The business also entails 500 mw of thermal power generation capacity, 800 mw of distribution along with generation facilities, besides an underground network of over 1,000 km. The distribution franchise is nine decades old with the licence valid till August 2036.
All three business segments of AEML operate under a cost plus fixed ROE regime subject to maintenance of operational parameters above normative levels. The licence area has earned 17-18% return on equity from the business through better operations. For the seven months ending March 2019, AEML posted a profit after tax (PAT) of Rs 43 crore on revenue of Rs 4,270 crore. With recent investments in Bharti Airtel’s Africa business, Byju’s and successful exit from RMZ, the Qataris have been ramping up its investment plans in Asia. They have created a unit to scour for opportunities in emerging markets in Latin America, Africa and Asia in an effort to snap up stakes in companies directly in what seems to be a throwback to their swashbuckling deal appetite in the last decade.
Source: Economic Times