The math behind the acquisition of JP's hydro power assets

While JP Power gets much needed cash to cut debt and finance ongoing projects, Reliance Power will dominate the private hydroelectric segment

It has been a while since the power sector witnessed a merger and acquisition deal. In a major development, Anil Ambani’s Reliance Power acquired the 1,800 MW hydroelectric power assets of Jaypee Group worth over Rs 10,000 crore. The sale comes within days of Abu Dhabi National Energy Co. withdrawing from buying two plants from the Jaypee Group.

An MoU was signed between Reliance CleanGen (RCL), a wholly-owned subsidiary of Reliance Power, and Jaiprakash Power Ventures (JPVL), a subsidiary of  Jaiprakash Associates (JAL), for acquisition by RCL of the entire hydroelectric power portfolio of JPVL. Reliance Power will become one of the largest providers of hydroelectric power in India's private sector, with 7,800 MW operating capacity by the end of FY15, if the deal goes through.  

As per the press release, JPVL’s portfolio consists of three plants, with an asset life of over 50 years, each using run-of-the-river technology to convert natural water flow to electricity, eliminating the need for a large reservoir. These plants include the 300 MW Baspa stage-two plant in Kinnaur in Himachal Pradesh, the 400 MW Vishnuprayag plant Chamoli District in Uttarakhand and the 1,091 MW Karcham Wangtoo plant in Himachal Pradesh. Reliance Power has its own hydro-electric power projects aggregating over 5,000 MW under various stages of development.

So what does the deal means to the two companies?

Looking at the market reaction, JP Power seems to be benefiting more from the deal. The stock had moved higher by nearly 8.2 per cent in the first hour of trading on Monday, while Reliance Power had moved higher by only three per cent.

It is natural that JP Power would move higher, since it will be getting much-needed cash in its hands. Jaypee Group intends to utilise the entire proceeds of the proposed transaction to reduce its outstanding debt and thereby deleverage its consolidated balance sheet, said a company statement. A Barclays report on the deal says that while the deal should help JP meet its debt obligation and finance its projects under implementation, the actual impact will be a function of the deal price, which has not yet been announced,

Edelweiss values the assets that are changing hands at Rs 17,100 crore, while various reports in media have attached a price tag of Rs 12,000-15,000 crore. Edelweiss too feels debt reduction through this asset sale is a positive for JP Associates.

As for Reliance Power, P Phani Sekhar, fund manager with Angel Broking has been quoted in Livemint as saying that the hydropower plants are operational assets and will help increase Reliance Power’s cash flow.