Signs exclusivity pact; deal size likely at $8 billion.
The great Indian coal rush Down Under continues. After months of intense negotiations and competitive bidding, Hyderabad-based GVK group has been shortlisted to acquire Hancock Coal.
GVK and Hancock had entered into an “exclusive arrangement” for negotiations that would continue till the middle of next month, said three independent sources aware of the developments.
GVK will have to make an initial payment of $1.3 billion (Rs 5,798 crore) or show its capability to do so within the exclusivity period. It would have to follow it up with similar payments of $1.3 billion each over the next three to four years towards equity, said these sources.
Over and above the $4 billion equity, GVK will have to pay another $4 billion as debt and mining development costs over the next six years, taking the total deal size to around $8 billion.
To organise the initial funds, GVK has approached some foreign and Indian banks such as Standard Chartered and ICICI. Three banks are likely to take an exposure of around $420 million each.
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E&Y is said to have done the due diligence for GVK.
GVK Chief Financial Officer Issac George refused to comment on the development.
However, sources, on condition of anonymity, said procedural issues apart, it was almost a done deal. Hancock’s brass even visited Hyderabad last month to attend a private function of the Reddy family, the promoter of GVK.
It is not yet clear which vehicle GVK will use for the acquisition. GVK Power and Infrastructure is the group’s listed entity for energy and infrastructure. Its market capitalisation is Rs 4,461 crore. Typically, companies float special purpose vehicles abroad for acquisitions to get financial flexibility. Interestingly, GVK will pay more than the market cap of its key corporate entity for Hancock.
Hancock is owned and managed by Gina Reinhart, the richest woman in Australia. It has two mines — Alpha Coal Project and Kevin’s Corner — in the coal-rich Galilee Basin in Queensland, Australia.
These assets were put on the block early this year. Their combined reserves are estimated to be eight billion tonnes. The life of these mines is estimated to be as much as 30 years.
Alpha Coal, the bigger of the two, is an open-cut mine. It has 3.6 billion tonnes of measured, indicated and inferred compliant coal.
Kevin’s Corner, which is right now under development, can produce 30 million tonnes per year. Analysts say it is a tough block to mine. The construction is expected to start this year and production is expected from the later part of 2013.
The two require huge investments in infrastructure, the cost of which will have to be borne by GVK once the deal goes through. They require a dedicated multi-user rail system, along with the existing rail infrastructure. They also need a port facility.
The GVK group, which is into power generation, airports and roads, has launched a division called GVK Natural Resources in its quest for natural resources. Hancock’s acquisition will get it coal for its power plants. It will also mark its entry into commodities.
GVK Energy, the power subsidiary, has only one coal-based power project, in Goindwal Sahib in Punjab, that is under development. It depends on domestic coal. The project’s capacity was increased to 1,860 megawatt (Mw) recently.
The company is expanding its 464-Mw Gautami and 216-Mw Jegurupadu gas-fired projects by 800 Mw each. It has three hydel power projects under development in Rishikesh, Gauriganja and Ratle with a combined capacity of 1,390 Mw. As a group, it aims to reach 10,000 Mw in the next three-five years.
Last year, Lanco Infratech, paid A$750 million (Rs 3,375 crore) to acquire Griffin Coal in Australia, outbidding GVK. This time, too, GVK had competitors such as JSW Energy and Essar, which showed initial interest in Hancock’s assets.
GVK was also a serious bidder for Griffin Coal, which is in Collie in Western Australia and has reserves of 1.1 billion tonnes.
In comparison, Hancock’s assets are much more expensive, but it has seven times the reserves. However, these assets are not producing immediately. At present, GVK is not developing any power project based on imported coal.
The year 2010 saw another high-profile coal asset purchase when Adani Enterprises paid $2.7 billion (Rs 12,300 crore) in cash and royalty to acquire Linc Energy, which has reserves of 7.8 billion tonnes.