GMR Infrastructure Ltd announced on Sunday that it would divest its 50% stake in US-based InterGen NV to China Huaneng Group for $1.23 billion (around Rs5,635 crore). Given the high debt position of the firm, this is certainly a positive development and its share price reacted accordingly, rising 5.3% to Rs46 per share in Monday’s trading session. In comparison, the Sensex rose 1.4% on the same day.
In October 2008, an overseas subsidiary, GMR Infrastructure (Malta) Ltd (GIML), had acquired a 50% stake in InterGen for $1.14 billion in a leveraged buyout. After that, GMR also paid about $130 million to service the debt and received a dividend of $32 million, according to an analyst. The proceeds from the sale, therefore, just about result in a break-even on the investment.
What does the stake sale mean for GMR Infrastructure? On paper, GMR Infrastructure holds a 5% equity stake in GIML, thus indirectly holding 2.5% equity stake in InterGen. But it has contributed to the majority of the equity portion of InterGen’s acquisition cost by buying compulsorily convertible debentures issued by GIML. It used this structure to avoid consolidation of accounts of GIML and InterGen, so as to reflect a low debt-equity ratio. But for all practical purposes, GMR Infrastructure, the listed company, is the ultimate owner of InterGen and the sale will help cut the company’s effective debt substantially.
In fact, if the sale hadn’t happened, the accounts of GIML and InterGen would have reflected in the company’s accounts after IFRS was implemented. According to analysts from Edelweiss Securities Ltd, “Post IFRS, (if GMR had not sold the InterGen stake), due to the leveraged buyout deal structure, the outstanding debt would have increased by about $1 billion, impacting the consolidated FY12E debt:equity further by about 0.5 times to about 2.6:1. But due to this deal, the consolidated debt:equity is expected to be about 1.8:1,”
Graphic: Yogesh Kumar / Mint
While the sale proceeds stand at over $1.2 billion, around $1 billion will be used to pay back the acquisition debt. The sale will effectively release cash flow of $225 million. Analysts maintain that the company is likely to use this money for funding ongoing road and power projects. GMR Infrastructure has been pressed for funds for sometime now and needs cash to manage its operations. The company has capacity addition plans of 5,000MW for its energy business.
The company’s fund requirements have been met through equity dilution through a qualified institutional placement of Rs1,400 crore and a stake sale (in GMR Energy) to IDFC/Temasek for Rs1,350 crore. According to a report by Prabhudas Lilladher Pvt. Ltd, “The money received from InterGen sale to the tune of Rs10 billion would come in handy to fund the ongoing road and power projects without dilution.”
More importantly, the deal offers much-needed relief from its high-debt position.
InterGen was also making losses at the net level. According to GMR Infrastructure’s annual report 2009-10, InterGen incurred a loss for the year ended 31 December 2009.
While that is good news for now, there are broader issues surrounding infrastructure stocks, which have checked their performance on the bourses and GMR Infrastructure’s stock is no exception to that. GMR’s stock has underperformed the BSE-100 since the beginning of the fiscal. Since one of the major overhangs on the stock was the high debt, the InterGen sale should result in better performance in the future.