On a Buying Spree

JSW Energy makes the third acquisition in a year

The power sector has witnessed a surge in mergers and acquisitions over the past year. Power major, JSW Energy has been a prominent deal maker undertaking three acquisitions during that period. The company targets 10,000 MW of generation capacity by 2020 and it is prepared to take the inorganic route, using its strong balance sheet to pick up distressed assets.

The first deal came about in September 2015, when JSW Energy bought two hydro assets for Rs 92 billion from Jaiprakash Power Ventures Limited (JPVL). This pushed JSW’s operational capacity to 4,531 MW from 3,140 MW.

In May 2016, JSW Energy agreed to buy a 1,000 MW thermal power plant, located in Chhattisgarh, from Jindal Steel and Power Limited (JSPL) for Rs 40 billion-Rs 65 billion. The latest deal came in July 2016, when JSW agreed to acquire the 500 MW (2×250 MW) Bina thermal power plant in Madhya Pradesh from JPVL for Rs 27 billion. Post all these acquisitions, JSW’s aggregate generation capacity will increase to 6,031 MW.

Details of the Bina deal

The deal was first announced in September 2014 when JSW signed a binding MoU with JPVL for a 100 per cent acquisition of the Bina power plant. An MoU was also signed for the acquisition of two hydropower plants (300 MW Baspa II and 1,091 MW Karcham Wangtoo, both in Himachal Pradesh).

As per the MoU, a corporate guarantee of Rs 10 billion was provided by JSW. While the acquisition of the two hydro plants was completed in September 2015, the acquisition of the Bina power plant was extended by almost two years and was finally announced in July 2016.

As per media reports, the deal was delayed due to a lack of agreement on the valuation of the plant. As of now, the consideration payable by JSW for the acquisition is linked to a base enterprise value of  Rs 27 billion, which is subject to further mutually agreed adjustments. However, as per industry analysts, this is a good bargain as the estimated value of the plant is Rs 30 billion-Rs 32 billion, compared to its acquisition cost of Rs 27 billion.

JSW plans to fund 75 per cent of the acquisition through debt, and the remaining through equity. The deal is likely to be completed by May 2017. However, the Competition Commission of India and the Madhya Pradesh government are yet to give approvals for the acquisition. The transaction will be executed by JPVL, selling its 100 per cent shareholding in a special purpose acquisition entity called Bina Power Supply Limited.

Rationale

The acquisition is likely to enable JSW to diversify its geographical footprint as well as fuel sources. The Bina plant has a domestic coal linkage for 100 per cent of its capacity, which comes as an additional  benefit, given the existing portfolio of JSW’s assets. Moreover, the plant has got a long-term power purchase agreement (PPA) for about 70 per cent of its capacity, which will increase the overall share of long-term PPAs in JSW’s holdings.

As for JPVL, the transaction will help the company to partly deleverage its balance sheet and reduce its interest payments. The net debt of JVPL stood at Rs 222 billion as of March 31, 2016.

The way forward

While the deal comes with the additional benefit of fuel supply and PPAs, the plant load factor (PLF) of the plant has been low due to muted energy demand. JSW, however, expects the demand for energy to increase by the time the acquisition is carried out fully. It plans for an increase in the PLF to 80-85 per cent, the range that it has achieved in  other plants. Assuming that the PLF does improve, and in view of the relatively low acquisition cost versus the valuation, the deal is expected to provide high returns to JSW. Hence, the acquisition fits quite well with the company’s inorganic growth strategy.

JSW continues to search for more potential assets that it could acquire. It is said to be considering 8-10 power projects across India with a war chest of Rs 40 billion-Rs 50 billion for suitable acquisitions. JSW is also planning to acquire coal mines overseas. To this end, it is considering the acquisition of 100 per cent equity in Minerals and Energy Swaziland (Pty) Limited, an African company with prospecting rights over 8,000 hectares of coal-bearing areas in Swaziland. This acquisition would be primarily aimed at securing imported coal for JSW’s existing operations and is tentatively valued at not more than $ 1.5 million.

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