M&A Update

Recent deals in the transmission segment

The transmission segment is buzzing with merger and acquisition (M&A) activity despite a lull in the power sector owing to the impact of Covid-19 on businesses. In the past three to four months, a couple of M&A deals have been finalised, indicating increased consolidation and asset monetisation in the segment. The India Grid Trust (IndiGrid), the infrastructure investment trust (InvIT) sponsored by Sterlite Power Grid Ventures Limited, has been at the forefront of recent deals in the transmission space. Set up in October 2016, IndiGrid was the first InvIT in the power sector and has demonstrated favourable outcomes so far through value accretive acquisitions of strategic transmission assets. It has recently acquired Jhajjar KT Transco Private Limited (JKTPL), which operates a crucial intra-state transmission link in Haryana.

Meanwhile, another key player, Kalpataru Power Transmission Limited (KPTL) is actively monetising its assets in order to reduce its debt. However, the company’s deal with CLP India Private Limited to sell three special purpose vehicles (SPVs) in July 2019 hit a roadblock after it terminated the agreement to sell one of the SPVs due to the non-fulfilment of certain conditions.

Power Line provides an update on the recent M&A transactions in the transmission space…

IndiGrid acquires JKTPL and ENICL

Recently, in May 2020, IndiGrid signed a share purchase agreement for the acquisition of 100 per cent stake in JKTPL from KPTL and Techno Electric & Engineering Company Limited (TEECL). JKTPL is a joint venture between KPTL and TEECL, in which KPTL holds 49.72 per cent equity. The transaction is estimated at Rs 3.1 billion (subject to certain adjustments on account of assets and liabilities at the time of closing of the transaction).

JKTPL holds the first intra-state transmission project awarded by Haryana VidyutPrasaran Nigam Limited to KPTL and TEECL on a competitive bidding basis under the public-private partnership mode in 2010. The project, executed on a design-build-finance-operate-transfer (DBFOT) basis, was commissioned in March 2012. It consists of three 400 kV transmission lines totalling 103 km and two substations with a transformation capacity of 830 MVA at Rohtak and Sonepat (Haryana). It evacuates power from CLP’s 1,320 MW Jhajjar coal-based power project in Haryana. So far, the transmission project has had a robust collection track record and a receivable cycle of less than a month. The concession period for the project is 25 years and there is a provision for a further 10-year extension.

Harsh Shah, chief executive officer (CEO), IndiGrid, stated in an official release, “This acquisition is in line with our strategy to acquire accretive operational assets with long-term and stable cash flows, thereby increasing returns for unit holders.” Notably, this is IndiGrid’s second transaction with TEECL as well as its second third-party transaction. It had earlier taken over TEECL’s Patran Transmission Company Limited in August 2018. With the completion of the recent deal, IndiGrid’s portfolio will increase to 10 transmission projects with a total network of 23 transmission lines that span over 6,000 ckt. km across 14 states.

In March 2020, IndiGrid completed another deal by acquiring East North Interconnection Company Limited  (ENICL) from Sterlite Power for Rs 10.2 billion ($134 million). ENICL consists of two 400 kV lines totalling 900 ckt. km across Assam, Bihar and West Bengal. IndiGrid had signed an extension of right-of-first-offer agreement with Sterlite Power for ENICL in May 2019. The acquisition was funded by internal accruals, proceeds from the issue of preference shares undertaken in May 2019 and new debt deals. IndiGrid also secured funding of Rs 9 billion from Axis Bank at a competitive rate of 8.1 per cent amid tough market conditions for refinancing the existing debt in ENICL. ENICL’s transmission service agreement has a remaining term of 15 years with a likely extension of 10 years. In a media release, Pratik Agarwal, managing director, Sterlite Power, said, “Sterlite Power is proud to successfully close ENICL’s sale process in these turbulent times. This marks our eighth asset transfer to IndiGrid and demonstrates our strong ability to commission and deconsolidate these system-critical assets from our balance sheet. ENICL is one of the few critical transmission lines that connect the north-eastern region of India to eastern India. We look forward to commissioning more assets in the next financial year and transfer about another $1 billion worth of assets to IndiGrid.”

IndiGrid has a pipeline of transmission assets worth Rs 65 billion under the framework agreement with Sterlite Power, providing visibility of about Rs 180 billion of assets under management over the next two years in addition to third-party opportunities. Meanwhile, IndiGrid will be acquiring Gurgaon Palwal Transmission Limited, which has been approved by its investors. The project is critical for meeting the load requirements of Gurugram and the upcoming region under the Prithala development plan. Out of nine elements in the project, eight have already been commissioned. The project is expected to be commissioned soon and will, thereafter, be taken over. The project is likely to be acquired at an enterprise value of Rs 10.75 billion on a zero cash and normalised current assets basis.

Further, IndiGrid has outlined its future M&A strategy of diversifying into the fast growing renewables sector. The company plans to acquire solar assets with a good generation track record, high cash flow predictability, less risk, long-term power purchase agreements and financially strong counterparties like NTPC, SECI and GUVNL. Despite diversification, IndiGrid intends to maintain the share of transmission projects in its portfolio at 75-80 per cent.

KPTL partially calls off deal with CLP

In another important development, in May 2020, KPTL called off its deal with CLP to sell its stake in Alipurduar Transmission Limited (ATL). To recap, KPTL signed an agreement with CLP for the sale of stake in three power transmission assets owned by separate SPVs – KSTPL, ATL and KMTL – at an estimated enterprise value of Rs 32.75 billion in July 2019. The deal was part of KPTL’s asset monetisation plan to pare debt while it marked the entry of a new player, CLP, in the transmission space. The latter is engaged in the generation of conventional and renewable power.

While KPTL successfully completed the sale of its 100 per cent stake in KSTPL in November 2019 and is on track to sell a 74 per cent stake in KMTL after commissioning the associated transmission line by August 2020, it has scrapped the deal to sell its 100 per cent stake in ATL. As per the agreement between KPTL and CLP, the former had to transfer its entire stake in ATL to CLP upon achieving commercial operations of associated transmission lines. KPTL commissioned the 400 kV Alipurduar-Siliguri line in January 2020 while the 400 kV Kishanganj-Darbhanga line was commissioned earlier, in March 2019. The agreement was, however, terminated due to the non-fulfilment of certain conditions. KPTL is already looking for opportunities to sell its stake in ATL and has even received interest from new potential buyers.

KPTL is focusing on hiving off all its transmission assets in order to meet the objective of becoming a net zero debt company by March 2021. It has already monetised three of four transmission assets and expects to finalise the sale of ATL by the end of June/July 2020. Manish Mohnot, managing director and CEO, KPTL, said in a media note, “We continue to make steady progress towards our commitment to sell our power transmission assets and non-core assets. We have successfully transferred the Satpura Transmission Asset to CLP in 2019-20. The evaluation of new buyers for the Alipurduar Transmission Asset has already started. We remain confident the Kohima transmission asset as per the given timelines. The sale of assets will generate significant cash for KPTL and we remain confident of achieving our goal to be a debt-free company by the end of March 2021.” The company’s net debt stood at Rs 9.69 billion (stand-alone) as of March 2020.

In sum, the transmission segment is expected to witness growing consolidation in the coming months. Given the segment’s performance in terms of stable revenues and returns, new players can look at entering the segment via the inorganic route.

Neha Bhatnagar

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