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Aurum Deal of the Month – June 2016

JSW Energy Limited (JEL) is acquiring the 1,000 MW (4X250 MW) power plant in Chhattisgarh’s Tamnar village in Raigarh district for an Enterprise Value of INR 65 billion from Jindal Steel and Power Limited (JSPL).

Enterprise Value per MW: INR 65 million per MW

The Transaction

The deal will be completed in two stages, an initial consideration of INR 40 billion and an additional INR 25 billion, if the plant secures a long-term power purchase agreement and fuel security before 2018. The plant also serves nearby JSPL facilities, and will be fully decoupled as part of the transaction. The plant will be transferred to a special purpose vehicle – Everbest Steel & Mining Holding before the transaction closure. The deal also involves payment of an interest-bearing advance of INR 5 billion, after approval from the shareholders of JSW Energy and Jindal Steel, and the Competition Commission of India.

The Plant has been operating at an average PLF of 63% in the first four months of 2016. The plant currently procures coal through e-auctions from Coal India after its captive mine was de-allocated. At INR 2.5/kwh and 70% PLF, the plant is expected to generate an EBITDA of upto INR 7.5 billion. This is however, conditional on JSPL fulfilling the conditions of PPA and fuels supply. If JSPL is unable to deliver on PPAs and fuel security, JEL would end up adding 1GW of open-ended capacity without a specific fuel source, which would aggravate the risk profile of the business.

There is currently no debt on the asset. However, in case some debt is transferred to the target SPV by JSPL, the amount will be subtracted from the EV. JSW’s FY16 Net Debt-to-Equity Ratio (D/E) stood at 1.8x. The transaction is expected to be funded by a 75:25 Debt and Equity mix. This is will increase the D/E to a level of 2.2 x post the transaction. Even then, JSW Energy would be amongst the least levered independent power producers (IPP) in India.

From JSPL’s perspective, post the transaction, the consolidated net debt for the company is likely to reduce from INR 473 billion in FY16 to the levels of 400 to 420 billion in FY18, depending on the final transaction value. JSPL will continue to have 2,400 MW installed power capacity in its power subsidiary and 1,649 MW installed power capacity in the parent company. The Group is looking to pare down the debt to INR 300 billion by FY20 and may also sell some of its other mining and steel assets. These may include the Group’s Botswana coal mine in Africa and a mine owned by its Australian subsidiary Wollongong Coal Limited. Power is expected to remain a key sector for JSPL and as per Ravi Uppal, JSPL CEO, they will expand the power business portfolio into renewable energy and transmission and distribution (T&D).

Even though the transaction is somewhat a family affair with Sajjan Jindal acquiring the asset to help out the younger brother Naveen Jindal, it is in line with the expectation of consolidation in the power sector, which has been marred by over-leveraged balance sheets. As per Ravi Uppal, Managing Director of JSPL, there were 12 more suitors for the plant.

JSW’s Acquisition Spree

The transaction is a continuation of JSW’s acquisition spree off late. The Group had acquired two hydroelectricity projects from Jaiprakash Power Ventures Ltd. for INR 93 billion last year. It enhanced JSW’s hydro asset base of 1,300 MW, making it the largest private producer of hydro power in India. Immediately at the conclusion of the deal, Jaypee Group announced that it has also signed a binding memorandum of understanding (MoU) with JSW Energy for the sale of its 500 MW Bina thermal power plant in Madhya Pradesh for an estimated INR 35 billion. JSW has an operational capacity of 4,531 megawatts, and as per its website, it is looking to more than double it in the short to medium term.

JSPL’s balance sheet stress

For Jindal Steel, the deal will infuse a much needed lifeline as it is struggling to meet its debt obligations. JSPL has a total debt obligation of INR 460 billion on its books and a market cap of only 56 billion (26th May 2016). Jindal Steel has been posting losses for last 6 quarters. The overall steel industry is facing pressure due to oversupply and decline in demand from China. JSPL’s position was also affected due to cancellation of its coal block allocations in Chhattisgarh. Naveen Jindal is himself facing charges for alleged irregularities in allocation of Amarkonda Murgadangal coal block to two Jindal group firms.

Jindal Steel is not the only potential seller of power assets in the market. The JSW-Jaypee deal was also, in part a result of lender pressure on the Jaypee Group. In fact the whole power sector has been laden with sellers in recent times looking to offload assets. Most sellers typically entered the sector in times of good economic growth and struggled to service their debts owing to cash flow problems due to project cost overruns, delays, fuel supply concerns etc. With pressure from lenders piling up, and the larger players looking to expand their generation capacity, we could see the trend of such mega acquisitions continuing in 2016 and beyond.

Share Price Movement

The transaction was announced by JSW Energy on the 4th of May 2016, with a filing on the BSE. JEL’s share price has risen by 8% since the announcement (as on 27th May 2016), while JSPL’s share price has declined by 7% in the same period.

aurum deal of the month

Disclaimer: Aurum Equity Partners LLP was not a part of this deal in any way.