Home / Companies / Why the ‘sale-with-a-right-to-use’ model is catching on

Mumbai: Got a valuable business asset? Sell it, pocket the money and strike a deal with the buyer to continue using the same asset for a fee. Businesses are increasingly resorting to the ‘sale-with-a-right-to-use’ model, a trend observers say may strengthen as demand in the economy continues to be weak.

On 1 June, Reliance Industries Ltd (RIL) announced the sale of its investment in a US joint venture that owned a network of 460-km pipelines and 10 plants linked to its energy venture in Eagle Ford Shale. The company earned $1.07 billion in the sale to an affiliate of Enterprise Products Partners LP while retaining the right to use the facilities for 20 years. “We are excited about the long-term relation with Enterprise," said a company statement. It said the deal is a significant opportunity for unlocking value.

In contrast to the earlier practice where companies used to sell mainly unrelated businesses, now they are increasingly selling their core assets to reduce debt, unlock value and evolve new business models.

On 28 May, Essar Steel India Ltd said it has “monetized" its Odisha slurry pipeline and oxygen plant for about 4,850 crore.

Essar will continue to use the oxygen plant for 15 years and the pipeline for 20 years for a fee, and the agreement could be extended at the end of the tenure, an Essar spokesperson said.

A similar deal for the slurry pipeline and coke oven at Visakhapatnam for approximately 7,000 crore is likely this financial year.

“For an infrastructure like a slurry pipeline, it (sale and use) may not be a common practice... But it is an interesting trend to watch out for," said Manish R. Sharma, partner, capital projects and infrastructure at audit and consulting firm PricewaterhouseCoopers India.

“Through this arrangement, a non-liquid asset becomes liquid and the capital asset is removed from the balance sheet and replaced by cash. Accordingly, any debt liability, associated with the capital asset is also removed from the balance sheet," Sharma said.

In a similar deal, Suzlon Group in April sold its German subsidiary Senvion SE to overseas investment firm Centerbridge Partners for approximately 7,000 crore.

Under the agreement, Suzlon can continue to use some of Suzlon’s technologies in India, while Senvion gets Suzlon’s licence for S111-2.1MW in the US market. S111-2.1MW is a popular wind turbine product.

In February, cash-strapped Bhushan Steel Ltd entered into a sale-and lease-back arrangement for its oxygen plants in Odisha to ease the stress on cash flow. The company did not disclose the earnings from the deal.

According to its 2013-14 annual report, the company has three working oxygen plants in Odisha. Bhushan Steel has been under pressure from its lenders to pare debt. About 51 banks have a combined exposure of 40,000 crore to the company.

Airlines were the earliest to try selling and leasing back planes, and the practice is now well-established in the industry. Domestic airlines, including state-run Air India Ltd, IndiGo (run by InterGlobe Aviation Ltd), SpiceJet Ltd and Jet Airways (India) Ltd, regularly make such deals. Air India plans to do a sale-and lease-back deal with the 27 Boeing B787 Dreamliner planes it has ordered.

Short-term gains?

An analyst said selling core assets brings short-term gains for many debt-burdened companies, but it will raise operating expenses. “If the liability to buy back is still there, investors should be able to look through these window-dressing measures to reduce debt," said Rakesh Arora, managing director and research head at Macquarie Capital Securities (India) Pvt. Ltd.

“Yes; it does reduce financial leverage, but increases operating leverage. Only good assets with steady cash flow will attract these kind of deals," Arora said.

Essar Group’s consolidated debt stands at 33,711 crore as on 31 March. Essar Steel is an unlisted entity. The consolidated debt of Suzlon Group stands at 15,362.34 crore as of 31 March.

Business opportunity

Asset sales spawn business opportunities for strategic investors or those specializing in a core area such as infrastructure.

“For all you know, you might see a new business emerging. Whoever thought that telecom companies would divest towers? It was very much seen as a core asset, but not anymore," said Kalpana Jain, senior director, corporate finance at Deloitte India. “You can have these models evolving. It is a matter of changing times. It is like companies outsourcing and insourcing many of their functions," she said.

For Srei Infrastructure Finance Ltd, leasing is the best option for asset creation in India considering the financial stress of Indian companies, Hemant Kanoria, chairman and managing director of the company said. Essar’s Odisha pipeline was bought by Odisha Slurry Pipeline Infrastructure Pvt. Ltd, part-owned by Srei Infrastructure and Edelweiss Group.

Another consultant said such sales do not make a business case for infrastructure companies and funds, adding that these are more in the nature of selling parts of assets to experts who can manage them better. “So, if it is a steel company, it can separate the infrastructure from the steel-making business," said Anjani Agarwal, India mining and metals leader at EY. “So, that asset is put in a structure by which the steel company can bring in a strategic operator or financier," she added.

Srei’s Kanoria cautioned that leasing will not gather momentum if the government does not remove the tax-related complications surrounding the leasing mode. However, for now, companies seem to be eager to generate cash out of critical assets.

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