GMR Energy joined a growing number of Indian companies who are tying up their coal requirements in Indonesia. The country has large reserves of the black gold which is used chiefly for power generation and steel-making, apart from other uses.
GMR Energy is buying a 30% stake in PT Golden Energy Mines, a subsidiary of PT Dian Swastatika Sentosa, which is part of Indonesia’s Sinar Mas group. It will pay about $450-$550 million or about Rs 2,025-Rs 2,480 crore for this stake, but what will determine the price from this range is not mentioned.
Usually, in M&A transactions, legroom in the deal price exists either for the results of due diligence exercises, on financials or assets, or working capital. In this case, the value of inventory at the time of deal closure may play a role in the valuation, since coal is not only an expensive but also a volatile commodity.
Along with the equity stake, GMR Energy has signed a long term off-take agreement with Golden Energy to buy coal. Under a 25-year agreement beginning January 1, 2012, it will buy coal, which will progress to a level of 10 million tonnes in the coming years.
Golden Energy will get cash inflow which it can use either to deleverage its balance sheet or invest in its mining expansion plans. It owns coal mines in Indonesia, with a resource level of about 1.9 billion tonnes and a reserve level of 860 million tonnes. The company had a production capacity of 10 million tonnes in 2010, which is higher than the level of 3 million tonnes achieved in earlier years. Its production is expected to ramp up 15 million tonnes by 2014.
But GMR’s investment may prompt it to take up its expansion plans up by a notch.
GMR Infrastructure is a holding company, with businesses as diverse as power, airport infrastructure and construction (highways and engineering, procurement and construction or EPC projects). Under energy, it has two operational power plants in Andhra Pradesh and one in Tamil Nadu. GMR Energy is the flagship of its energy business and, as is the trend nowadays, every power project is set up as a special purpose vehicle.
In 2010-11, GMR Infrastructure’s consolidated energy business earned revenues of Rs 2,186 crore, growing by 7%, while its earnings before interest, tax, depreciation and amortisation rose by 15%.
The GMR Infrastructure share was down by 0.2% on Friday, the day the announcement was made. This will be a sizeable outlay for GMR, which already has debt of Rs 20,928 crore compared to a net worth of Rs 11,490 crore.
The acquisition helps the company secure at least a part of its coal supplies. Though it will have to pay market-related prices, it may have entered enter into fixed-price long term contracts. That will protect it from wild price fluctuation in the coal market. It will also use the surplus for trading, it said.