Mega Deal: ATL-RInfra agreement promises mutual benefits

ATL-RInfra agreement promises mutual benefits

Mega Deal

In one of the largest takeovers in the power sector in recent years, Adani Transmission Limited (ATL) will acquire Reliance Infrastructure Limited’s (RInfra) integrated power business in Mumbai. This is the second deal between the two companies after ATL acquired two transmission projects from RInfra in a deal valued at Rs 10 billion in November 2017. The acquisition marks the Adani Group’s foray into the distribution segment in India. For RInfra, the sale is a major step in its deleveraging strategy for future growth. A look at the key features of the acquisition…

The deal

On December 21, 2017, the two companies signed a definitive binding agreement under which RInfra will sell its 100 per cent stake in its Mumbai generation, transmission and distribution (GTD) business. Earlier, in October 2017, the companies had entered into a period of exclusivity, valid until January 15, 2018, for the same. Discussions on the deal had begun in September 2017.

RInfra’s Mumbai GTD business caters to approximately 3 million customers in the city with an aggregate demand of almost 1,900 MW and an annual energy input requirement of about 10,800 MUs, 500 MW of coal-based capacity at the Dahanu Thermal Power Station (DTPS) and over 540 ckt. km of transmission network. DTPS has a long-term power purchase agreement for distribution of the entire capacity in Mumbai, and a long-term fuel supply agreement with South Eastern Coalfields Limited. The total value of the deal is Rs 132.51 billion. This comprises the main business valued at Rs 121.01 billion and approved regulatory assets of Rs 11.5 billion. In addition, regulatory assets that are currently under approval, estimated at about Rs 50 billion, and the net working capital as on closing, estimated at Rs 5.5 billion, will flow directly to RInfra.

Outcomes and impact

This acquisition will not only enable ATL to get into the power distribution business, but will also give a boost to its transmission business. ATL’s cumulative transmission network will reach around 12,000 ckt. km, of which approximately 9,540 ckt. km is already under operation and about 2,350 ckt. km is at various stages of construction. The company’s transformation capacity will also increase to 19,200 MVA from 36 substations spread across the country. Gautam Adani, head, Adani Group, noted in a media statement, “We see the distribution sector as the next sunrise sector as India embarks on its mission to achieve 24×7 power for all. We see a massive growth opportunity and will look at both organic and inorganic opportunities to build a market-leading distribution company.” He further added, “With this acquisition, ATL will enjoy the benefit of scale and of being an integrated distribution and transmission business in India.”

As for RInfra, the deal will help it to repay most of its outstanding debt of Rs 150 billion, easing the stress on its balance sheet. RInfra is not only expected to become debt-free but also have a cash surplus of Rs 30 billion. This is, reportedly, the largest ever debt-reducing exercise by any corporate. Going forward, RInfra will focus on upcoming opportunities in asset-light engineering, procurement and construction and defence businesses.

As an immediate impact, the shares of ATL and RInfra surged 10 per cent on the stock exchanges in intra-day trade. From Rs 205, ATL crossed the Rs 225 mark on December 21, 2017 and reached Rs 244.6 the next day. In a similar trend, RInfra’s stock increased to over Rs 490 from about Rs 465 on the date of announcement of signing the agreement and rose to almost Rs 540 on December 22, 2017.

While the proposed transaction remains subject to regulatory and customary approvals, the rise in the share values of both companies clearly indicates that the deal is a positive for both the companies.