Analysts are relieved at Bangalore-based GMR disposing its 50 per cent stake in Dutch utility Intergen.
Two years after it was bought, the management decided to sell the stake on a ‘no profit, no loss’ basis. GMR bought the stake for $1.135 billion and sold it for $1.232 billion. It got $100 million more than its buying price, but the net gain was meagre.
GMR bought the asset with an equity contribution of $137 million, and debt of around $1 billion. GMR spent $130 million to service this massive debt, getting a dividend return of $33 million, according to IDFC Securities.
Intergen had an operating power capacity of 8,146 Mw. GMR’s own operational portfolio was a tenth of Intergen’s, at 808 Mw, even as it planned to add 8,448 Mw.
Indian utilities offer much better returns, since there is a huge demand-supply gap in power. Internationally, utilities yield returns of five to six per cent, whereas returns from power plants in India could be as high as 20-21 per cent. Barring Mexico and The Philippines, Intergen’s assets were in mature markets like the UK, Netherlands and Australia.
Place & time
“It is advisable for Indian companies to go for Indian utilities and greenfield (new) projects within the country and look abroad to tie-up for resources like coal,” said Debasish Mishra, senior director-energy and resources group, Deloitte.
Others say the acquisition’s timing was wrong. “The deal was done in 2008, when no one expected the crisis would be so severe. The valuation was on the higher side and negotiations could have started earlier when valuations were very high,” said Jagannadham Thunuguntla, Equity Head, SMC Capitals.
A report by Edelweiss said they’d valued the Intergen stake at Rs 3.4 per share, and the yield from the deal was marginally lower. “There have been many cases where companies have made investments in the boom period and have bled. GMR exited from the investment at the right time, and came out without posting a big loss,” said a Mumbai-based analyst.
Stock markets and brokerages cheered the company’s decision to exit and de-leverage its balance sheet. On the Bombay Stock Exchange, the stock went up by 5.2 per cent in today’s trade to close at Rs 46 per share.
“This deal re-emphasises the company’s focus on enhancing the cash flow and operating profits, rather than just focusing on asset creation and strengthening the balance sheet,” said a report by Edelweiss. The report also estimates that debt for Intergen ($1 billion) would have impacted the next financial year’s debt : equity ratio by 0.5 times, taking it to 2.6:1. But this deal could reduce it to 1.8:1.
Brokerages had not been happy with the value addition of Intergen to GMR. “In our view, Intergen’s financials were not strong enough to service the acquisition debt,” said a report by Citi.
The sale will free up equity to the tune of $225 million for GMR and IDFC Securities says this cash flow from the stake sale would go towards funding the power project pipeline over the next 12 months. The brokerage has kept its sum-of-the-parts valuation and net cash flow for the company unchanged after the sale and maintained its outperformer rating on the stock.
