Growth Opportunity

IPCL’s stake acquisition in MEPL to create a win-win situation

The power sector continues to witness significant mergers and acquisitions (M&As). In a recent development, integrated power utility India Power Corporation Limited (IPCL), formerly known as DPSC Limited, signed an agreement with France-based ENGIE Global Developments B.V. (formerly GDF Suez S.A.) to acquire the latter’s 89.11 per cent stake in Meenakshi Energy Private Limited (MEPL). MEPL currently operates the 300 MW Thamminapatnam Thermal Power Plant (TPP). MEPL is also developing the 700 MW Thamminapatnam TPP II at Krishnapatnam, in Nellore district in Andhra Pradesh.

Win-win deal

The deal between ENGIE and IPCL will create a win-win situation for both players. While the former is looking to offload coal-based assets to reduce its carbon footprint, the latter is exploring avenues for expanding its domestic generation portfolio through the inorganic route.

In December 2013, ENGIE had acquired a 74 per cent stake in MEPL from its parent company Meenakshi Energy and Infrastructure Holdings Private Limited, and PTC India Financial Services Limited, another stakeholder. The deal, estimated at $150 million, marked ENGIE’s entry into the Indian power market. Later, ENGIE increased its stake to 89.11 per cent. However, as a part of its business transformation exercise, which is focused on creating a low carbon dioxide energy mix and reducing exposure to commodity prices, ENGIE finalised the deal for selling off 13 GW of generation assets in February 2016. These include projects aggregating 10 GW in the US, 1 GW of coal-fired power plants in India (MEPL) and the 2 GW Paiton power plant in Indonesia. Reportedly, several domestic and international companies including the Adani Group and Morgan Stanley Infrastructure Partners were interested in acquiring ENGIE’s Asian assets.

The sell-offs will help ENGIE reduce the net debt by Euro 5.5 billion. As per the official press release, “ENGIE’s entire shareholding in Meenakshi, located in India, will be sold to IPCL, a company listed on the National Stock Exchange. The deal is expected to close in the first half of 2016, subject to customary approvals and regulatory consents.”

IPCL, which is mostly wind based, was on the lookout for thermal assets to expand its generation portfolio. MEPL’s acquisition will quickly increase its capacity, which currently stands at 109 MW, by 1,000 MW, thereby reducing the gestation period required for setting up a greenfield plant.

MEPL commissioned two 150 MW coal-based units of the Thamminapatnam TPP-I in 2012-13 and has a firm fuel linkage from Coal India Limited, as well as a power purchase agreement with Andhra Pradesh state utilities. Meanwhile, two 350 MW units of the Thamminapatnam TPP-II are expected to be commissioned in August 2016 and November 2016, as per the Central Electricity Authority.

IPCL, on the other hand, is executing a 450 MW coal-based power plant at Haldia in West Bengal, which is expected to be commissioned during 2016. The Rs 26 billion project is funded at a debt-equity ratio of 70:30 by the Rural Electrification Corporation and the Power Finance Corporation. Besides generation, IPCL has a presence in power distribution and has been operating as a licensee at Dishergarh in Asansol for over 90 years. It also took over distribution operations as a franchisee in Gaya and surrounding areas in Bihar, in 2013-14.

Deal contours

The financial aspects of the proposed deal between ENGIE and IPCL have not been disclosed and the exercise of due diligence is under way. MEPL reportedly has a debt of Rs 30 billion and is likely to seek additional funds of around Rs 3 billion to complete the execution of the Rs 50 billion Thamminapatnam TPP-II. IPCL intends to fund the acquisition mostly from internal accruals and seek external debt if required. After the completion of the transaction, MEPL will become a subsidiary of IPCL.

The way forward

Going forward, the M&A scenario in the power sector is likely to remain active as developers continue to focus on offloading stressed assets. As per a report by Crisil Ratings, power projects totalling 46 GW are facing viability issues (as of July 2015) due to lack of long-term power procurers, inadequate fuel supply, and aggressive bidding to win projects and coal blocks.

Public sector banks have also become wary of holding non-performing assets in the power sector and this is compelling private players holding debt to look at divesting stakes in TPPs to deleverage and raise funds. The increase in stressed assets has, therefore, created acquisition opportunities for players with deep pockets.

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