Adani, R-Power deals just the start; NTPC too will join rush to buy assets in power firesale

The purchase of Lanco Infra's Udupi thermal plant by Adani Power for an enterprise value of around Rs 6,000 crore, and the July announcement on the acquisition of Jaiprakash Group’s hydel power assets by Reliance Power for an undisclosed sum (but estimated to be upwards of Rs 10,000 crore) is the result of three pressures. This is just the start of the Great Indian Power Fire Sale.

First, the sellers are clearly reeling under debts. They are using the favourable business climate ushered in by the Modi government to start unburdening themselves. Both Lanco, with a group debt of nearly Rs 35,000 crore, and Jaypee Power Ventures, with over Rs 24,500 crore, are clearly weighed down by debt. The Jaiprakash Group’s total debt exceeds Rs 60,000 crore - which is one reason it is exiting hydro-electric power completely with the sale.

Second, this move has been partly prodded by banks, who clearly want the weaker power players to sell to their stronger rivals so that their bad loans can become good. The sector is clearly in consolidation mode. The Adani Group has begun flexing its muscles after seeing its shares rise phenomenally this year with the ascent of Narendra Modi to the prime ministership. It is now able to leverage its market value to invest more. In this calendar year, the three listed Adani Group companies (Adani Power,Adani Ports, and Adani Enterprises) have gained over Rs 52,000 crore in terms of market capitalisation.

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In April, the Adani group said it had become the largest power player in the private sector with a capacity of 8,620 mw. With the addition of Lanco’s 1,200 MWUdupi plant, it is closing in on 10,000 mw, and plans to raise the total to 20,000 mw by 2020. A lot of the cash will come from exiting its port terminal in Australia. Reliance Power, after the purchase of Jaypee, will have a better power balance between thermal and hydel. By the end of March 2015, its total power capacity is expected to be around 7,800 MW, according to this Mint report.

Third, the cash-rich public sector National Thermal Power Corporation’s decision to grow through acquisitions may have played a role in pressuring the private competitors to get a move on and buy power assets before the going gets tougher and prices higher. In February, NTPC, which has over Rs 17,000 crore of cash, sought expressions of interest (EoIs) from promoters wanting to sell their “coal-based power plants, whether operational, commissioned, synchronised, under construction or under planning stages”, the Business Standard reported then.

That notice apparently drew a lot of sellers, with The Economic Times reporting in June that as many as 30 offers were received by NTPC. A clue to the Adani and Reliance Power deals with Lanco and Jaypee lies in that report, which said, quoting sources, that “Jaypee Power Ventures, Lanco Infratech, GMR Infrastructure, and iron ore miner Sesa Sterlite have offered to sell some of their power plants to India’s largest power producer NTPC…”.

The two recent M&A deals could thus have been hastened by the mere fact that India’s power T-Rex, NTPC, was in the market for big-ticket acquisitions valued at “between Rs 25,000 crore and Rs 30,000 crore” this year.

Given the fact that private sector players have the ability to move faster than leaden-footed public sector players, both Adani and Reliance Power appear to have moved in quickly for the kill (though, it must be said, that NTPC was not looking to buy hydel assets, only coal-based plants). For the sellers, overburdened with debt, cash today always looks better than cash tomorrow from NTPC, which is subjected to all kinds of public scrutiny, not to speak of political interference.

What this means is that other debt-burdened private parties could also sell in the coming weeks and months. Among them: GMR Infra, GVK Power, and Sesa Sterlite. GMR has huge debts of nearly Rs 40,000 crore. The group planned to reduce its debts by listing its power subsidiary GMR Energy earlier this year, but the plan was aborted in April. These assets may now be for sale.

GVK Power and Infra, which has debts of nearly Rs 22,000 crore, could be selling shares in its airports holding company or some of its power assets to bring down debt.

As for Sesa Sterlite, the management has been muttering darkly about coal price increase - and could this be on the market for a sale, if the price is right.

Clearly, Jaypee and Lanco are mere straws in the wind. Get ready for more action in power M&As in the coming months.