Tata Power's plan to sell Indonesian arms hits valuation hurdle

Dev Chatterjee & Sanjay Jog | Mumbai Sep 24, 2016 12:57 AM IST
Tata Power’s plan to sell stake in two of its Indonesian companies – Arutmin and Kaltim mines – is in jeopardy, with the valuation of the two companies falling by half, owing to sagging coal prices.

Global investment banking firm Jefferies has estimated that the combined valuation of Tata Power’s stake in the two firms is now down to $990 million, compared to $2 billion when the deal was signed in 2014. The cash flow from the sale of the projects was to help reduce Tata Power’s consolidated debt that touched Rs 40,120 crore as of March this year.

In January 2014, Tata Power had announced it would sell its stake in Arutmin back to local Bakrie Group for $500 million. In July 2014, it informed the stock exchanges it had signed an option agreement to sell five per cent stake in Kaltim mines for $250 million to Bakrie Group. It held 30 per cent stake in Kaltim mines. Both transactions have not closed till date, as coal prices fell to record lows, making buyers jittery.

Bankers said the local buyer wants to renegotiate the transaction, as the deal is uneconomical for the buyer. The global coal prices have softened from $82 a tonne to $59 a tonne and, reflecting the trend, the Indonesian coal prices also fell from $64 a tonne to $47 a tonne since 2014. Indonesian coal usually sells for 20-25 per cent discount to global prices due to its lower quality. “Although this drop in prices has helped Tata Power to reduce losses at its Mundra power project, which is fuelled by imported coal, the falling prices have hit the valuation of its Indonesian thermal companies hard,” said a banker.

When contacted, a Tata Power statement said the valuation of Arutmin as on agreement date still holds good, despite any subsequent market valuation changes and, hence, has no relevance to the transaction already done for Arutmin.

Since the transaction was announced, Tata Power stock has seen a steady decline. The stock fell from its peak of Rs 114 a share in July 2014 to Rs 76 apiece as on Friday.

The company is now aspiring to become one of India’s biggest solar power producers, having taken over Welspun Group’s renewable power portfolio at an enterprise valuation of Rs 9,200 crore. Early this week, it signed a deal with ICICI Venture to set up a fund with a corpus of $850 million to take over distressed power assets in India.

Tata Power is not the only company that has seen its calculations over overseas coal mines go awry. The Essar Group, Adani Group, Lanco, and GVK are also facing the brunt of falling coal prices.  Most of the coal mines of top Indian companies are either making losses or are on the verge of closure. Essar Group’s $600-million investment in Trinity Coal Corp in the US turned bad, as the company went into Chapter 11 in 2013.

Named after the US bankruptcy code 11, Chapter 11 is filed by companies that require time to restructure their debts, and it gives the debtor a fresh start, subject to the debtor’s fulfilment of his obligations under the plan of reorganisation.

The investments by GVK Group ($1.26 billion in Hancock), Lanco ($600 million in Griffin) and Adani Enterprises ($1 billion) in the Australian coal sector in 2011 remain in the red.


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