M&A Critique

Adani’s Power

CURRENT TRANSACTION

Adani Power Limited, a subsidiary of Adani Enterprises Ltd and a part of Adani Group, had executed a definitive agreement for the acquisition of 100% shares of the Udupi Power Corporation Limited from Lanco Infratech Limited- a Rs.6,000 crore deal.

LANCO INFRATECH LIMITED (LITL)

LITL is an integrated infrastructure player in the country having business verticals in EPC, power, solar, natural resources and infrastructure. At Lanco Infratech, high fuel costs and low capacity utilization have increased financial stress. Lanco had put the power plant on the block two years ago, aiming to use the proceeds to lower its consolidated debt (Rs 35,000 crore as of March).

ADANI GROUP

The group, controlled by billionaire Gautam Adani, is planning to concentrate on the Indian infrastructure sector and has put its loss-making coal terminal in Australia for sale at a reported valuation of $2 billion. In April, the Adani group announced it had become the largest private power producer in India, with an overall installed capacity of 8,580 MW, comprising of 4,620 MW at Mundra in Gujarat, 2,640 MW at Tiroda in Maharashtra and 1,320 MW at Kawai in Rajasthan.

WHAT UDUPI POWER PLANT CONSISTS?

  1. The power plant has 1,200 MW capacity. The first unit of the plant, with a capacity of 600 Mw, was commissioned in November 2010, while another 600 Mw in January 2011. Udupi plant had also signed an agreement with the state government for a further expansion of 1,320 Mw;
  2. The Udupi project has power sale agreements with Karnataka to sell 90 percent of generated power and with Punjab for 10 per cent;
  3. It is the first independent power project (IPP) in the country based on 100 per cent import coal and has a captive jetty of 4 million tonnes per annum. The capacity can be expanded to handle another 4 million tonnes;
  4. It also has an external coal handling system in the New Mangalore Port Trust.

But the unit has been facing operational issues that even led to a stoppage of production in June, as Rs 1,800 crore of arrears from the Karnataka Electricity Board piled up. Also, Lanco, which was importing Indonesian coal to run the power station via New Mangalore Port, failed to lift the fuel from a ship berthed at the port.

WHAT ADANI GAINS?

It will further consolidate Adani Group’s position as India’s largest private sector power producer.  With one more unit of 660 MW commissioning at Tiroda shortly and this acquisition of 1200 MW Udupi power plant, the installed base of Adani power will increase to 10,440 MW, getting Adani Power closer to its goal of achieving 20,000 MW of capacity by 2020. This will also mark their entry into southern India. Adani power will endeavor to expand the capacity of Udupi expeditiously, leveraging its project execution capabilities. Adani power is also committed to seize further opportunities for capacity addition and provide much-needed energy security of Southern India.

WHAT LANCO GAINS?

The primary reason for the sellout seems to be the ballooning debt, due to lack of fuel, low tariffs and distribution bottlenecks. The transaction will support LITL in reducing its debt of Rs. 4,000 crore and receive Rs 2,000 crore cash. The Udupi sale follows the divestment of Lanco’s 70MW Lanco Budhil hydropower project and two smaller plants of 5MW each in Himachal Pradesh to Hyderabad-based Greenko Energies Pvt. Ltd for €77 million. The sales have been inspired in part by a corporate debt restructuring (CDR) agreement that the company entered into with creditors. In December 2013, Lanco Infratech’s bankers approved a proposal to restructure a total of Rs.7,700 crore of the company’s debt, allowing the power generator a two-year interest holiday. Many Indian companies, especially in the infrastructure space, are selling assets to reduce debt. Last month Reliance Power Ltd, controlled by Anil Ambani’s Reliance Group, agreed to buy the hydropower assets of Jaiprakash Power Ventures Ltd for an undisclosed amount. The sale is to enable Jaypee group’s efforts to pare debt of around Rs. 60,000 crore.

MARKET MOVEMENT

The Udupi transaction was announced after market hours on 13th August 2014 .announcement of such transaction is not perceived as positive for either party to the transaction and price of both the companies are almost same till date even though market as a whole has gone up by more than 1000 d. points during the same period.

VALUATION

This is the largest acquisition in the thermal power space.  Also, it is another large deal announcement in the power sector, coming within weeks of Reliance Power’s to buy the Jaypee group’s hydropower assets of 1800 MW for a reported valuation between Rs 12,000 crores and Rs 15,000 crores.  Want of any recent deal in the thermal power sector renders any comparison difficult.  The Average cost of acquisition per MW by reliance power for hydropower comes to Rs. 7.5 crore, whereas it Rs. 5 crore for Adani. The new thermal plant implementation cost per MW also comes to Rs. 5 Crore.

CONCLUSION

Power sector and particularly thermal power producers are having a tough time since the last few years. It faces multiple problems like any other power producer but the main problem is to get coal at a competitive rate.  Imported coal cost varies due to rupee depreciation where selling price per unit does not change leading to lower contribution. Further, as in all the cases, recovery from state power distribution companies is not commensurate with sales stressing financial management already constrained by heavy leverage Lanco perfectly fits the description. So it has no choice to reduce some of its debts at the earliest to run remaining assets efficiently. It is a win-win situation for both the parties as Lanco has been scouting for a buyer to pare debt that had ballooned in recent years when the power sector was in deep trouble.  Adani Group’s jumped in to have a power generation capacity of 20,000MW by 2020. Adani’s are bullish on expanding presence further in the country.

Adani Power is also learnt to be in talks with other debt-laden companies for buying out their power plants that includes India Bulls’ Amravati power plant and with Jaypee Group to buy out its Bina power plant. The consolidation in the ailing power sector is seen as a sign of revival for serious players looking to buy distressed assets of 50,000 MW in the secondary market. With stable government at the centre, the sector’s outlook has improved as it has raised the appetite of potential buyers and in the process prompting some sellers to seek a higher valuation for their assets.

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M & A Critique