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Malaysian co 1MDB & JSW Energy lead race for Lanco's Udupi power plant; deal valued at $1.1-billion\

  • State-owned 1 Malaysia Development Bhd (1MDB), the second-largest independent power producer in the Southeast Asian country, has emerged as the frontrunner to acquire Lanco Infratech's 1,200 mw coal-fired power plant at Udupi in Karnataka, underscoring the growing interest of global utilities in the battered Indian power sector.

  • The transaction, valued in excess of $1 billion, is poised to be the largest thermal power asset sale in the country and will help cash-strapped power and road developer Lanco pare debt, multiple sources with direct knowledge of the development said. Lanco's debt, taken on to build power plants and roads and to purchase overseas coal mines, has swelled more than fourfold since March 2010. Previous efforts to raise Rs 4,150 crore by selling stakes in a subsidiary that owns stakes in its various power plants, road and renewable energy projects, to private equity funds haven't succeeded.

  • But 1MDB is jostling with Sajjan Jindal's JSW Energy Ltd, which has aggressively revived its interest in the coastal project after its first round of advance negotiations with Lanco's top brass fell through in early 2013. With a large steel and power sector presence already in the state, the Udupi Power acquisition will help JSW Group to further consolidate its presence in Karnataka. It already has an 860MW power plant and a 10 million tonne steel plant in Vijaynagar. JSW watchers say the Udupi project has long been on the radar of Jindal himself.

  • The potential suitors are conducting the final round of diligence that is expected to get completed in the next two weeks, following which final negotiations over terms and documentation will get initiated. "The Malaysians are ahead in the diligence. Compared to the rest they have advanced the most in their discussions and are serious to make their India debut. They have a much longer-term bilateral strategy. With a mission to enhance energy security of Malaysia, 1MDB have been scouting for operational assets in the region," said one of the officials mentioned above on condition of anonymity.

  • The ministry of finance owned 1MDB started life as a sovereign wealth fund but is now a "strategic development company" investing in "high impact projects" in energy, real estate, tourism and agri-business. As per company policy stated on its corporate website, 1MDB does not comment on speculation and market rumour. Emails sent to the media spokesperson of the company on Monday did not generate any response as of press time on Tuesday.

  • A JSW Energy spokesperson said: "We do not wish to comment on market rumours. However JSW Energy as part of its growth strategy looks to evaluate opportunities for growth, both organically and inorganically." Lanco's spokesperson responded to ET's questionnaire saying, "At this juncture we regret our inability to comment on the issues raised in your mail." Lanco group, reeling under Rs 36,500 crore of debt as of December 2013, is likely to get an equity valuation of Rs 1,920-2,100 crore ($320-350 million) for the 100% stake in the imported coal-fired power plant. Lanco, owned by L Madhusudhan Rao, invested Rs 6320 crore to build the power plant and plans to cut debt by transferring Rs 4,500-4,800 crore ($750 million-800 million) to the buyer. The total enterprise valuation is likely to be $1.15 billion.

  • Last December, in a major relief for Lanco, a consortium of lenders led by IDBI Bank restructured Rs 7,700 crore of loans and released Rs 3,500 crore toward working capital to resume engineering operations, which had to be mothballed following a severe cash crunch. But as part of the corporate debt restructuring (CDR) package, which includes a two-year interest holiday, Lanco had to commit that it would proactively sell assets across its diverse portfolio of power, clean tech, overseas coal mines and highways and improve cash flows. This February, Lanco sold its hydro power projects to clean energy specialist Greenko Energies Pvt Ltd for an estimated Rs 650 crore. In the past year, the Lanco Infratech stock had dropped 23% while the Sensex has risen 19%.

  • The Udupi power project is attractive to strategic buyers as any hike in fuel costs can be entirely passed on to buyers. Lanco has an agreement with five power distribution companies in Karnataka to sell 90% of its production and the remaining 10% to Punjab State Power Corporation. It also owns a jetty at Mangalore port to import coal for the plant. More importantly, the final tariff order from the Central Electricity Regulatory Commission (CERC) in February offers much-needed clarity. The order translates to a healthy tariff of around Rs 4.20-4.30 per unit. It also facilitates the recovery of around Rs 1,600 crore of dues or receivables from the state electricity boards or SEBs. The regulator has also partially approved the cost escalation in the project, thereby allowing Lanco to recover 85% of the capital cost.

  • According to analysts, the tariff order is the single biggest policy catalyst for the deal. During previous rounds of discussions with JSW, the lack of visibility on tariffs -- which have a direct bearing on valuation -- was a hurdle to any potential deal. For 1MDB, the Udupi project offers a platform to expand its existing power generation business ahead of a planned listing. Fresh from winning the large Project 3B and inking an agreement to build a 50 MW solar power plant, 1MDB has been on the prowl for power acquisitions to bulk up its assets in emerging markets and make the planned listing of its energy unit more appealing to investors, said analysts tracking the company. It may tap into the cash resources of its existing power plants to finance the transaction.

  • "It's one of the most prized operating assets with no fuel or revenue risks. There is additional land for further capacity expansion of another 1,320 MW. In one shot, one can get scale," said an analyst justifying the valuation. "With rupee depreciation, a lot of assets are also cheap now. Even then the deal will close only post elections. The India sovereign and regulatory risks still persists," he added. The Malaysian powerhouse has been on an acquisition spree. In FY13 it bought Genting group's power-generation unit, Sanyen Sdn Bhd, and Tanjong group's power unit, Tanjong Energy Holdings Sdn Bhd, from T Ananda Krishnan.

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