Its move to acquire GMR’s stake in InterGen will boost its power asset portfolio; GMR’s funding needs will ease.
If the news about Tata Power vying to acquire GMR’s 50 per cent stake in US-based InterGen materialises, the former would immediately witness a significant boost to its current operational capacity of 3,000 Mw. Besides, it will take the company closer to its target of achieving 25,000 Mw of power generation capacity earlier than 2016-17.
The move, if successful, will also expand Tata Power’s international presence, currently in Saudi Arabia, Bangladesh, Kuwait, Algeria, Myanmar and Thailand. InterGen has 12 plants located in the UK, the Netherlands, Mexico, Philippines and Australia, with a total generation capacity of 8,146 Mw and another 4,500 Mw under development.
Usually, it takes Rs 3-4 crore per Mw in case of a thermal plant and a little less for a gas-based (80 per cent of InterGen’s assets) one. Given that other companies, including China's Huaneng Group, are in the fray, analysts expect the bidding to be fairly aggressive. Meanwhile, reports indicate that Tata Power may end up paying $1-1.2 billion for the stake, which translates into a deal value of Rs 1.5 crore per Mw (about Rs 6,000 crore for buying 50 per cent of the total 8,000 Mw). It will also save on time, as it gets already operational international assets of InterGen, unlike the 30-36 months needed to build a gas-based power plant.
Tata Power is sitting on cash and investments of about Rs 8,000 crore (or $1.7 billion, based on a rupee-dollar rate of 47) as on March. Besides, there is always an option of raising money by offloading stakes in group companies or through the equity route, among others. Hence, funding the acquisition should not be an issue.
As far as GMR is concerned, the stake sale is positive, as dividends received from InterGen were not sufficient to fulfill the interest costs of the loan taken for acquisition. The company had bought the stake in October 2008 for $1.1 billion; most of it was funded through debt (loan). If the deal goes through as reported, GMR will then be able to deploy the money into lucrative domestic assets (especially power) and get better returns.
Meanwhile, concerns over funding persist, as it requires huge amounts to invest in various projects in the airport, power and road segments. The company is already heavily leveraged, with net debt-to-equity of two times as on 2009-10, proving to be a drag on its profitability. The InterGen stake sale, however, is unlikely to boost its stock valuation in a significant manner, given that the stake was valued at less than 10 per cent of GMR’s average sum-of-parts valuation of Rs 63 per share, as estimated by analysts.
