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M&A IN SURGES WITH Anju Prajapati1, Soumitra Kansabanik2 1PGDM, Finance Department, (IMT-Nagpur), Nagpur, 2Senior Executive –Corporate Finance, Blue Star Limited, Mumbai, India

Abstract their own renewable energy set up or by Merger & Acquisition was becoming a less acquiring who is specialist in this particular common affair in Indian market. And for domain. In the past three years Indian power power sector it has almost become extinct sector surged up with increased merger and mainly because of power sector becoming a acquisition activities. This calendar year has loss making business, because of their already experienced 17 such deals worth $ 1.6 bleeding financials. With the new billion. Main reason for high number of government in place and new set of rules and acquisitions in power sector is because while benefits offered to the company installing riding the power boom 5-10 years back, many renewable source of energy companies power companies had embarked on expansion started diversifying their business into aggressively, which ultimately proved to be renewable sector. Acquisition of Welspun wrong decisions due to change in economic Energy by Tata Power will definitely boost environment and inherent issues / risks to the the market of acquisition in power sector and sector. For e.g., environment clearance, land will encourage other companies to expand acquisition, fuel unavailability, and weak their business. India will soon see many financial health of state electricity boards. The reforms and expansion in renewable energy wrong decision resulted into huge debt and sector. muted cash flow. This lead companies to sell Index Terms: Acquisition, Credit Metrics, their assets and it was available with attractive Enterprise Valuation, Purchase Power valuation. Agreements (PPA) Within the power sector renewable energy I. Introduction: segment, got the prominence owing to low “The company is pursuing growth in Renewable availability of domestic fuel and high volatility Energy space to create value for its in international coal prices. shareholders through various organic and inorganic growth opportunities” “Deal activity in the renewable segment is Anil Sardana, CEO & MD Tata Power expected to gain momentum as several large operational portfolios come up for sale/ private Renewable sources of energy is in boom and investment and a large number of green-field everyone's point of concern considering the fact assets are opened for bids by the government,”- of scarcity of fossil fuel in the near future. Mr. Singh said. Companies producing electricity started In June 2016 Tata Power Ltd. completes its diversifying their portfolio by commissioning acquisition by 100% share purchase. This is the

ISSN (PRINT): 2395-7786, (ONLINE):2395-7794, VOLUME-3, ISSUE-1, 2017 8 INTERNATIONAL JOURNAL OF PRORESSES IN ENGINEERING, MANAGEMENT, SCIENCE AND HUMANITIES (IJPEMSH) largest transaction in renewable energy sector in stakeholders. It operates under numerous India valuing Rs. 9249 crore. verticals that has around 107 companies under II. : them. The major ones which brings major Tata group is an Indian conglomerate holding revenue to the group are , , company founded in the year 1867 which Tata Consultancy Services, , received the global recognition after acquiring Tata Global Beverages, Tata Power, Tata several multinational companies. It is a $ 116 Teleservices, Tata Communication and Taj billion large company and the most interesting Group. fact is each Tata company operates III. Business Verticals independently under the guidance of its own The Tata Group is one of the most diversified board of directors and shareholders. Tata group organisations in India. The major categories/ employed more than 660,000 employees and is companies in Tata Group are given below: widely known for its value creation for the

Fig 1: Business Structure of Tata Group [Source: Information from Wikipedia]

The Tata Group is having very strong by 10% since 2013. This is mainly because of fundamentals which can be proved from the fact dramatically higher coal prices as assumed in that it holds 7.9 % of the total market the plannings and a fixed price arrangement the capitalization of . Mundra plant in 2012made big losses. Because IV. Tata Power: of this the company made losses for 3 Tata Power is an electric utility company. The successive years and cash flow became an issue core business is to generate, transmit and for the company. TPREL (Renewable sector of distribute electricity. The company is having a Tata Power) signs a PPA for 100MW solar generation capacity of 9432MW. Along with 35 project at Anantapuram solar park. The locations [Exhibit 3] in India the company has shareholding pattern of the company is given overseas operation also in Singapore, Bhutan, below: Indonesia and South Africa. The company is having revenue of 9000 Cr. which came down

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Table 1: Shareholding Pattern of Tata Power as on FY 2016 [Source: www.moneycontrol.com]

V. About the Deal: India. This acquisition will help add value to the The renewable section of the Tata Power has value for all the stake holders as majority of the added Welspun Renewable Energy Pvt. Ltd.( a assets acquired are both revenue generating and green sector of Welspun Energy Pvt. Ltd.) for operating. With operational excellence and an estimated of Rs. 10,000 crore ($ 1.4 billion). financial and process optimizing experience The acquisition made was share purchase based Tata Power can enhance the value of these agreement. Welspun Renewables is the wholly assets which can give higher return to owned subsidiary of Welspun Energy which is shareholder’s equity. again co-owned by Welspun Enterprises. Tata Another rationale behind Tata Power’s move is Power is paying 37% of the deal value as equity due to economic opportunity and suitable component and the rest is taken as debt. They government decision and support. The billion are paying Rs. 3650 cr. as equity component. dollar acquisition decision was taken when The rest is the debt amount which acquiring government set up ambitious targets for clean company will look to refinance and for lender’s energy / renewable energy sector that have approvals. This deal is the India’s largest deal in attracted large number of Indian companies as renewable energy sector. Tata Power after well as global financial investors. In fact selling some of their overseas operations companies in other sector started diversifying focused more on its Indian operations. into renewable energy business. For e.g., Moser VI. Rationale of the deal: Baer has closed down its CD/DVD Welspun Renewable Energy is one of the top manufacturing business and shifted their few producing company in India portfolio in renewable energy generation that is spreading across 10 states. In its portfolio (mainly ). Moreover that being in it has about 1140 MW of renewable energy the solar industry it was clear that the silicon projects. Out of which 990 MW is solar and rest prices were coming down which was the major 150 MW is . Out of the total Capex for Solar power generation. Tata Power capacity 88% is operational that is management waited for the silicon prices to approximately 1000MW, the rest is under enter a stable zone before entering into any advanced stage of implementation. Tata M&A transaction. Renewable Energy Ltd currently operates at a capacity of 294MW, and 500 MW of renewable assets were carved out of Tata Power to his wholly owned subsidiary. Besides these 400 MW of Solar and Wind projects are at advanced stage of implementation. After acquisition Tata Power will be having 2300 MW making it the largest renewable power generation company in

ISSN (PRINT): 2395-7786, (ONLINE):2395-7794, VOLUME-3, ISSUE-1, 2017 10 INTERNATIONAL JOURNAL OF PRORESSES IN ENGINEERING, MANAGEMENT, SCIENCE AND HUMANITIES (IJPEMSH) VII. Capacity comparison Pre & Post Merger:

Total 1194 MW Total 2334 MW Operating Capacity 794 MW Operating Capacity 1794 MW Projects under development ~400 MW Projects under ~540 MW development Running Capacity (if full 66% Running Capacity (if full 77% load) load) Fig 2: Pre and Post merger Capacity difference of Tata Power [Source: (B) Investor’s Presentation prepared by Kasturi S @ Tata Power Ltd.]

VIII. Other Opportunities: Development Bank which had signed an 1. Opportunity for GE Energy Financial agreement to make equity investment of $ 50 Services million in Welspun Renewables. GE Energy Financial Services is an American multinational conglomerate of General Electric. IX. Deals in Power Sector: In the year 2014 it agreed to invest $ 24 million The interest of strategic player in buying assets in a 151 MW solar photovoltaic power project has been seen in rise since last 5 years. Looking built by Welspun Renewables at Madhya at a global perspective number of M&A deals Pradesh which didn’t happen but can very well increased YoY with the increasing demand in be leveraged with a bigger size and with the non-conventional energy generation because of brand name of Tata. scarcity in fossil fuel. The number of deals got a 2. Opportunity for Asian Development dip in and around year 2011 and again it is at a Bank rising spree. The same can be retrieved from the It is giving an exit opportunity Asian graph below:

Fig 3: World-wide M&A trend since 1985 in Power Sector [Source: imaa-institute report]

ISSN (PRINT): 2395-7786, (ONLINE):2395-7794, VOLUME-3, ISSUE-1, 2017 11 INTERNATIONAL JOURNAL OF PRORESSES IN ENGINEERING, MANAGEMENT, SCIENCE AND HUMANITIES (IJPEMSH) Below mentioned chart represents few of the top deals in the power sector.

Table 2: Major deals in Power sector in 2016 [Source: (4) Tata Power-Welspun deal brings focus back to M&As in renewable by Swaraj Singh Dhanjal published in Livemint] Indian Power Sector experienced a three times $200 million. jump in the value of merger and acquisition There were six domestic transactions made in activity for January-May period in 2016 renewable energy sector with a disclosed value compared to the same period last year. In 2016 of $ 147 million. The key transaction amongst there were 17 deals till now worth $ 1.6 billion the deal was acquisition of undisclosed equity which was 15 deals worth $601 million in the stake in Essel Green Energy by Piramal last year. Enterprises & APG Asset Management for Year 2015 experienced 14 M&A deals in the $ 132 million. Five foreign transactions also renewable energy sector worth $ 2.27 billion. In took place with a deal value of $30 million. The September 2015 JSW Energy Ltd bought two major acquisition done was an investment of hydroelectric power plants from Jai Prakash 50% stake into SITAC RE Pvt Ltd. by EDF Power Ventures Ltd. for Rs. 9700 crore. Few of Energy Nouvelles. the big deal includes Semcorp Industries Ltd’s There's this foreign player which is an US based acquisition of Green Infra. The deal was of 60% organisation named as Ahana Renewables who stake on Green Infra. have marked their presence by stepping into Singapore based sovereign wealth fund GIC Pte growing renewable power market by doing an Ltd has invested $ 256 million in Greenko acquisition worth 100% stake into Armstrong Group. Energy Global's solar power development Looking at the few previous deals it can be business for an undisclosed price. assumed that the sector is having healthy The M&A activities in the renewable energy pipeline of few more big deals. As per sector are normally driven by competitive Kameswara Rao from PwC that there are bidding for projects, leading to lower economic minimum four to five opportunities in the returns. So companies conclude by acquiring market which came up in the earlier waves of assets which has better economic fundamentals renewable energy development. than getting involved in aggressive bidding Opportunities came highly in the sector. For rounds. example, was in talk with X. Historical acquisition by Tata Power: SunEdison Inc. to buy its local assets. Later, it Since 2007 Tata Power has acquired 7 shifted and they sold off their minority stake in companies. The acquisition portfolio includes its Indian solar projects to Finland’s Fortum both Indian as well as foreign companies. Tata OYJ. Basically three equity investors namely power made significant inroad in the renewable Argonaut Ventures, New Silk Route and energy segment by acquiring Welspun Bessemer Venture in March 2015 were trying Renewables. Prior to that Tata Power has been locating to sell their 80% stake into Kiran into acquisition whose details are furnished Energy Solar Power Pvt. Ltd. for the amount below.

ISSN (PRINT): 2395-7786, (ONLINE):2395-7794, VOLUME-3, ISSUE-1, 2017 12 INTERNATIONAL JOURNAL OF PRORESSES IN ENGINEERING, MANAGEMENT, SCIENCE AND HUMANITIES (IJPEMSH) Acquiring Stake Sr. no. Acquired Company Country Year Company acquired 1 Welspun Renewable India 100% June Energy 2016 2 Itezhi Tezhi Power Zambia 50% Mar 2015 Corporation 3 Energy projects Ltd. India 100% Dec 2014 4 Geodynamics Australia 10% Sep 2008 Tata Power 5 Coastal India 100% Apr 2007 Power 6 PT Kaltim Prima Indonesia 30% June Coal equity 2007 7 PT Arutmin Indonesiastake June2007 Indonesia Table 3: Historical acquisitions of Tata Power [Source: www.tata.in]

XI. Transaction details of the deal: said, Tata Power will acquire Welspun Renewables at Tata Power has not figured out things properly an enterprise valuation of Rs. 9249 crore which which are pretty much evident from the includes debt of Rs. 5500 crore which will add decisions it took of factoring into the possibility up in Tata Power’s balance sheet. of low plant load factor (PLF) and also into its The acquisition was 100% share purchase high maintenance and operation costs, by transaction. As Tata Power is getting into the delaying into the payment for state electricity deal with Rs. 5500 crore debt on its balance boards i.e., SEB's with higher interest costs for sheet they are paying 37% of the deal value as nearly 1000 W for Welspun Capacity for equity component. Tata Power will be looking generating profits. Not only that, it has also for refinancing the debt amount and will created the large portfolio for solar with power approach for lender’s approval. The funding for purchase agreements (PPA's) and had contracted the transaction came to Tata Power after selling with high tariffs for the span of 25 years which off some of their overseas operations so as to in return is large in itself. provide more focus on Indian Operations. Another analyst stated that in order to get ROE Investment banks JM Financials & Barclays are of 16 to 17 Tata Power need to operate at 20% the financial advisors of the deal. KPMG COGS and interest rate less than 10% with XII. Investor’s View: super efficiency in O&M. Moddy’s Investors Service commented that Tata Ajay Saraf, Executive Director of ICICI Power’s credit metrics is already tight at the securities stated that assets of Welspun current credit rating scenario. Acquiring Renewables are of high quality with Welspun will add high amount of debt in their Photovoltaic modules sourced from class-A books which will negatively impact Tata manufacturers which are backed by Power’s credit metrics and further the credit performance guarantee. This will ensure a ROE rating. They also added that this acquisition will of 16% which is better than CERC’s benchmark add up scale and diversification in renewable return. energy for Tata Power which will get extra XIII. Market Reaction: benefit from supportive regulatory environment. The news came out in the market on June 12 As per an analyst from a leading brokerage firm 2016

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12th June 2016 Tata Power

Fig 4: Share Price movement of Tata Power [Source: www.moneycontrol.com] We can see from the above graph for Tata After this the shareholders getting the strong Power Ltd. It is seen that after the acquisition fundamentals of the assets that Tata Power is news was announced initially the shareholders purchasing, its operating efficiency and of Tata Power reacted in a very negative way till capability to generate revenue made them 20th July. This is mainly due to the fear of invested in Tata Power for longer return adding up debt to already stressed balance sheet. .

12th June 2016 Welspun India

Fig 5: Share Price movement of Tata Power [Source: www.moneycontrol.com] From the time the merger was announced there profit making segment of Welspun India with a was not much movement seen in the share price currently stressed out company may not give but after 2 months when the merger got them well return. There might be integration approved it came out as a negative sentiment for problem between the two companies. the shareholders. The rationale of merging a

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Sr. No Ratio Tata Power Welspun India . FY’ FY’15 FY’1 FY’ FY’1 FY’16 14 6 14 5 1 EPS 3.5 3.3 2.36 2.98 50.8 5.99

2 Current Ratio 0.46 0.59 0.59 0.92 1.07 1.12 3 Quick Ratio 0.37 0.49 0.47 0.48 0.66 0.59 4 Inventory turnover 12.14 13.0 12.2 5.14 5.64 6.00 ratio 5 Net Profit/ Share 4.02 3.74 2.85 2.97 50.78 5.99 6 EBITDA Margin (%) 34.1 36.1 38.1 22.97 25.69 27.27 7 Net Profit Margin (%) 11.1 11.6 9.1 0.84 11.57 12.36 8 Return on Networth 8.0 7.0 5.3 2.84 35.60 32.03 (%) 9 Return on CE (%) 4.2 3.7 2.8 1.15 17.38 16.03 10 Return on Assets 3.1 3.0 2.3 0.72 10.56 11.39 11 D/E Ratio 0.74 0.73 0.73 2.05 1.41 1.14 12 Asset turnover Ratio 28.2 25.9 24.8 85.28 91.31 92.15 Table 4: Comparative Ratio Analysis of Tata Power & Welspun India

Exhibit 2: M&A in Power Sector over last 5 1. Merger years 2. Acquisition of shares M&A over last 5 years has been categorised 3. Sale of Assets into three parts: All the data has been taken from CMIE Prowess

Mergers History Sr. Swap Event Target Company Acquirer No. Ratio Date 1 Goa Energy Ltd. Vedanta Ltd. 01-Apr-14 Indraprastha Power Pragati Power Corpn. 2 0.91 01-Apr-14 Generation Co. Ltd. Ltd. Jindal India Power Hindustan Powergen 3 3.42 01-Aug-11 Ventures Ltd. Ltd. 4 N T P C Hydro Ltd. N T P C Ltd. 01-Apr-12 Shree Renuka Energy 5 Ravindra Energy Ltd. 1 01-Apr-12 Ltd. Steel Exchange India 6 Simhadri Power Ltd. 1 01-Apr-13 Ltd. Sri Indira Power Energies Seshachal Technologies 7 23-Apr-12 Ltd. Ltd. 8 Torrent Energy Ltd. Ltd. 01-Apr-14

Table 5: Merger History

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Sr. Cash No. of Event No. Target Company Acquirer Consideratio Share Date n s 15-May-1 Ltd. Adani Enterprises Ltd. 23891.5 1 3

Gautambhai Shantilal 2 Adani Power Ltd. Adani & Rajeshbhai 7000 3981 22-Jan-16 Shantilal Adani Adani Properties Pvt. 3 Adani Power Ltd. 4146.8 22-Jan-16 Ltd. Adani Transmission 4 20-Feb-15 (India) Ltd. Ltd. Aravali Transmission Adani Transmission 5 01-Jul-16 Service Co. Ltd. Ltd. B S Powertech Swelect Solar Energy 6 11-Dec-13 Solutions Pvt. Ltd. Pvt. Ltd. Bina Power Supply 7 J S W Energy Ltd. 18-Jul-16 Ltd. -Wr Adani Transmission 8 157.3 23-Nov-15 Transmission Ltd. Ltd. D G E N Transmission Instalaciones Inabensa 9 17-Mar-15 Co. Ltd. S A Duryodhana Adani Green Energy 10 0.1 21-Dec-15 Developers Pvt. Ltd. Ltd. Godawari Green 11 Shiv-Vani Energy Ltd. 560 56 02-Sep-16 Energy Ltd. Sembcorp Green Infra 12 Green Infra B T V Ltd. 16-Aug-13 Ltd. Himachal Baspa Power 13 J S W Energy Ltd. 01-Sep-15 Co. Ltd. Ideal Energy Projects 14 Tata Power Co. Ltd. 22-Jan-16 Ltd. Ideal Energy Projects 15 Tata Power Co. Ltd. 10-Dec-14 Ltd. Ind-Barath Energy Ind-Barath Thermotek 16 3119.3 21-Jul-15 (Utkal) Ltd. Pvt. Ltd. 17 Karma Energy Ltd. Kotta Enterprises Ltd. 28-Jan-14 Inspeed Power Pvt. 18 Karma Energy Ltd. Ltd. 26.6 14.79 15-Dec-14 Prabhanjan Multitrade 19 Karma Energy Ltd. Pvt. Ltd. 18.4 10.24 15-Dec-14 Korba West Power Co. 20 Adani Power Ltd. 42250 24-Nov-14 Ltd. 21 Eastern Adani Transmission 20-Feb-15

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Maru Transmission Adani Transmission 22 446.5 01-Jul-16 Service Co. Ltd. Ltd. Meenakshi Energy Pvt. India Power Corpn. 23 25-Feb-16 Ltd. Ltd. Newgen Saurashtra Tata Power 24 Windfarms Ltd. Renewable 25-Feb-14 [Merged] Energy Ltd. Orient Green Power 25 S V L Ltd. 1500 22-Feb-13 Co. Ltd. Orient Green Power Syandana Energy Pvt. 26 500 14-Sep-15 Co. Ltd. Ltd. Papu Hydropower 16-May-1 27 C E S C Ltd. Projects Ltd. 2 Patran Transmission Techno Electric & 28 13-Nov-13 Co. Ltd. Engg. Co. Ltd. Patran Transmission Techno Electric & 29 18-Nov-13 Co. Ltd. Engg. Co. Ltd. Powergrid Vizag Power Grid Corpn. Of 30 154.1 30-Aug-13 Transmission Ltd. India Ltd. Pravara Renewable B I F India Holdings 31 29-Feb-16 Energy Ltd. Pte. Ltd. Purulia & Kharagpur 32 Sterlite Grid Ltd. 09-Dec-13 Transmission Co. Ltd. Raipur-Rajnandgaon-W Adani Transmission 33 182.5 23-Nov-15 arora Transmission Ltd. Ltd. Rapp Transmission Co. 34 Sterlite Grid Ltd. 12-Mar-14 Ltd. R R Infralands Pvt. 35 Rattanindia Power Ltd. 3599.1 30-Sep-14 Ltd. Reliance Infrastructure 36 Reliance Big Pvt. Ltd. 22-Mar-13 Ltd. Reliance 37 Reliance Power Ltd. 6460 950 24-Jan-14 Infrastructure Ltd. Shalivahana Green A M P Capital Asian 38 1610 06-Jun-12 Energy Ltd. Fund Shekhawati 39 Transmission Service Emco Ltd. 05-Feb-13 Co. Ltd. Shree Maheshwar Power Finance Corpn. 40 Hydel Power Corpn. 02-Jun-16 Ltd. Ltd. Shree Maheshwar Power Finance Corpn. 41 Hydel Power Corpn. 02-Jun-16 Ltd. Ltd.

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Surana Solar Systems Surana Telecom & 44 0.1 10-Jun-13 Pvt. Ltd. Power Ltd. 45 T C P Ltd. V R Venkatachalam 95.5 20-Aug-13 Thiruvalluvaar 46 T C P Ltd. 147 3 22-Jan-14 Textiles Pvt. Ltd. 47 Torrent Power Ltd. Torrent Pvt. Ltd. 457.1 04-Sep-12 Tamilnadu Generation Udangudi Power 48 & Distribution Corpn. 28-Mar-13 Corpn. Ltd. Ltd. Udupi Power Corpn. 49 Adani Power Ltd. 63000 20-Apr-15 Ltd. 06-May-1 50 Vadinar Power Co. Ltd. Essar Oil Ltd. 4 Table 6: Acquisition of shares history Sales of Assets History Cash Sr.N Event Target Company Asset name Acquirer Considerati o. Date on Adani Transmission 31-Mar-1 1 Adani Power Ltd. Transmission Line Business 4 (India) Ltd. Power Adani Adani Power 31-Mar-1 2 Transmission Transmission Maharashtra Ltd. 4 Busniess (India) Ltd. Hydro Power Portfolio - Jaiprakash Power Baspa-II, J S W Energy 26-Sep-1 3 Ventures Ltd. Vishnuprayag & Ltd. 4 Karcham Wangtoo 300MW Baspa-II & 1091 MW Jaiprakash Power Himachal Baspa 01-Sep-1 4 Karcham Ventures Ltd. Power Co. Ltd. 5 Wangtoo Hydro-Electric Plant 500 MW Bina Jaiprakash Power J S W Energy 18-Jul-1 5 thermal power 27000 Ventures Ltd. Ltd. 6 plant Jayshree Chlor Alkali Aditya Birla 21-Sep-1 6 2120 Chemicals Ltd. Division Chemicals 5

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Fig 6: Capacity distribution of Tata Power [2] R. Prasad, “Merger & Acquisition deals on REFERENCES the rise in power sector,” The Economic [1] EY Publication, “Power sector sees 166% Times, Mar 2014 surge in mergers & acquisitions activity,” The Hindu

ISSN (PRINT): 2395-7786, (ONLINE):2395-7794, VOLUME-3, ISSUE-1, 2017 19 INTERNATIONAL JOURNAL OF PRORESSES IN ENGINEERING, MANAGEMENT, SCIENCE AND HUMANITIES (IJPEMSH) [3] S.S. Dhanjal, “Tata Power-Welspun deal brings focus back to M&A in renewable,” Live Mint, June 2016 [4] FE Bureau, “EY: Power sector M&A deal value triples in Jan-May to $1.6 billion,” The Financial Express, June, 2016 [5] D. Sengupta, ”M&A deal value in the power sector surges one and half times,” The Economic Times, June, 2016 [6] S. Jog, A. Kumar, “Tata Power’s Welspun deal is not without risks,” Business Standard, June, 2016 [7] S. Kasturi, “Tata Power: Investor’s Presentation”, June 2016

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