Landmark Deal

AEML-QIA agreement marks a first in the distribution segment

In a major private equity (PE) deal, Adani Transmission Limited (ATL), Adani Electricity Mumbai Limited (AEML) and a subsidiary of the Qatar Investment Authority (QIA) have signed definitive agreements for the sale of 25.1 per cent stake in AEML to QIA. AEML is an integrated power distribution, transmission and generation utility that serves 3 million consumers across a licence area of about 400 sq. km in Mumbai. This business was acquired by ATL from Reliance Infrastructure Limited (RInfra) in 2018 in a deal valued at Rs 132.51 billion. With this, ATL entered the power distribution segment.

The Rs 32 billion investment deal includes subordinated debt of Rs 20 billion and Rs 12 billion for the stake acquisition. AEML aims to utilise the proceeds to fund its capex requirement for expanding capacity and deleveraging its balance sheet. It has earmarked a capex of Rs 12 billion for maintenance, upgrade of its existing distribution network and capital addition. It will also help improve the reliability of connected bulk supply. The capex envisaged by the company is fully funded. The first PE deal by a foreign investor in the Indian distribution segment, this has triggered hope for more such deals. “We are delighted to embark on this partnership with the Qatar Investment Authority. Together, we will continue to work towards improving the reliability of supply and consumer satisfaction for over 3 million AEML consumers in Mumbai,” says Gautam Adani, chairman, Adani Group.

Deal details

In December 2019, ATL, AEML and a subsidiary of QIA signed definitive agreements for the sale of 25.1 per cent stake in AEML to QIA and for a shareholder subordinated debt investment by QIA in AEML. The total investment by QIA as part of the deal is estimated at Rs 32 billion. QIA will invest Rs 12 billion in AEML to buy a quarter of the company’s common equity. It will provide Rs 20 billion as staple shareholder loan or subordinated debt (preferred equity), valuing the business at Rs 168 billion, inclusive of its debt. “We believe that Adani Electricity Mumbai Limited is the best-in-class electricity utility in India and has tremendous potential for growth,” says Mansoor Al-Mahmoud, chief executive officer, QIA. Doha-headquartered QIA is a sovereign wealth fund of Qatar, founded in 2005 to strengthen the economy by diversifying into new asset classes. QIA’s long-term investment portfolio aims at complementing Qatar’s wealth in natural resources.

As a part of the deal, ATL and QIA have agreed to definitive plans to ensure that over 30 per cent of the electricity supplied by AEML is sourced from solar and wind power plants by 2023. They have also agreed on several other green initiatives. The deal was approved by the Competition Commission of India in end-2019 and is expected to be completed in 2020, subject to regulatory approvals customary conditions precedent. SKN Advisors Limited acted as the financial adviser and Cyril Amarchand Mangaldas acted as the legal adviser to ATL and AEML on the transaction. Meanwhile, J.P. Morgan acted as the financial adviser and Cleary Gottlieb Steen & Hamilton LLP and AZB & Partners as the legal advisers to QIA on the transaction.

Other developments

In another development, AEML is reportedly considering raising up to $1.5 billion – about $1 billion via bonds and $400 million-$500 million through syndicated loans. It aims to utilise the proceeds from these bonds to pre-pay the loan taken from banks, including ICICI Bank, the State Bank of India and Bank of Baroda, to fund the acquisition of RInfra. These loans have a maturity period of five to seven years. This refinancing via dollar bonds is expected to give the company a cost advantage. The company is also in discussions with foreign banks to raise up to $500 million through syndicated offshore loans, which will be used for capacity expansion. The syndicated loans would reportedly have a maturity period of three to five years, and would be priced at 250-275 basis points over the London Inter-Bank Offered Rate. Apart from the electricity sector, Adani as a group has reportedly been looking for strategic partners across all its businesses, including gas distribution, petrochemicals and renewables, to de-risk its portfolio. It has the advantage of a high promoter shareholding in most group companies, allowing it the comfort to dilute equity in favour of financial or strategic partners. In October 2019, France-based Total SA had agreed to buy a 37.4 per cent stake in Adani Gas to create one of the largest downstream energy partnerships in city gas distribution in the country. Notably, QIA is also an investor in Total SA.

Conclusion

Industry experts believe that QIA’s investment could prompt long-term overseas investors to re-look at opportunities in the Indian power distribution segment. However, they are expected to be interested in organised and less risky business models such as a private distribution licensee in metro cities, which have a better demographic profile, negligible subsidy dependence and low distribution loss levels. The cost-plus tariff framework provides stability in returns for such licensees, assuming their costs and efficiency levels are in line with regulatory benchmarks. Undoubtedly, going forward, with the easing of regulatory hurdles, there are greater chances of foreign investor participation in the Indian power distribution segment, which has been largely ignored thus far. n

Priyanka Kwatra

 

 

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