GVK Group, controlled by Indian billionaire G.V. Krishna Reddy, plans to raise $1 billion selling a stake in its energy unit to help fund the purchase of coal assets from a company owned by Australia’s richest woman.
The group that runs airports and builds power plants and highways, plans to sell the stake in GVK Coal Developers (Singapore) Pte. in three to six months, said G.V. Sanjay Reddy, vice chairman of GVK Power & Infrastructure Ltd. (GVKP), the group’s publicly traded unit. GVK agreed to pay $1.26 billion to buy a 79 percent stake in Gina Rinehart’s Hancock Prospecting Pty. coal assets, according to a statement e-mailed on Sept. 16.
Utilities in Asia’s second-fastest growing major economy are seeking fuel in Australia and Indonesia to overcome a local shortfall as they build power plants. The GVK Group may spend a total of $2.1 billion, including development costs, for the purchase, Chief Financial Officer Isaac George said. The company will borrow $1 billion, he said.
“The acquisition will give the coal security for its power plants and also make it a notable player in coal, which is so much in demand today,” said Jagannadham Thunuguntla, chief strategist at New Delhi-based SMS Wealth Management Services.
GVK Coal is buying the 79 percent stake in the Alpha and Alpha West projects, all of the Kevin’s Corner project as well as the rail and port projects connecting the coal deposits to Abbot Point in Australia’s Queensland state. Privately held Hancock Prospecting is chaired by Rinehart, the first woman to top Forbes Asia’s list of Australia’s richest people.
“This deal will help us secure fuel for our thermal power projects,” George said in a telephone interview on Sept. 17. “We are also planning to enter the business of commodity trading of coal.”
GVK agreed to pay $500 million once the transaction is completed, followed by $200 million one year from the deal closing. It will pay an additional $560 million after the financial closure of the project, expected to be in 2012. Funding for the acquisition is “tied up with banks,” GVK said in the statement, without disclosing names of the lenders.
Hyderabad-based GVK will keep GVK Power & Infrastructure, which had 52.5 billion rupees ($1.1 billion) of long-term debt at the end of March 31, or almost double the company’s market value, out of the fund-raising process, Reddy said in a separate interview on Sept. 17.
GVK Power & Infrastructure will own 10 percent of GVK Coal with an option to raise the stake to 49 percent, according to the statement. GVK Power & Infrastructure will invite Rinehart on its board as a director, according to the statement.
“They may be stretching themselves too thin for the acquisition,” said Thunuguntla. “Even if the listed company’s contribution is not major, in the event of any risk, it will have to bear the onus being the largest company in the group.”
GVK Power & Infrastructure rose 3.5 percent to 17.60 rupees at 9:59 a.m. in Mumbai trading after climbing as much as 7.4 percent, the most since Feb. 11. The stock has dropped 56 percent this year, after reports of the purchase began in January.
At full output, the projects may produce 84 million metric tons of coal annually, GVK said in the Sept. 16 statement. Production is scheduled to start in 2014 at a rate of 30 million tons of power station coal a year, the company said. Development of the first phase of output is estimated to cost $10 billion, it said.
“We have a feeling that the project development cost can be significantly brought down to $7 billion,” Reddy said. “This can happen through cost optimization and outsourcing a range of activities such as coal washing and laying rail tracks.”
Ernst & Young LLP was the sole financial adviser to GVK, according to the statement. The transaction is expected to close in two weeks, the statement said.
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