Corporate: M&A - Tata Power(s) a return gambit

M&A
Tata Power(s) a Return Gambit

Hit by shrinking marketshare, the group hopes to claw back by merging three power companies and acquiring stakes in independent projects.

By Ranju Sarkar

Call it the 3-D effect. Three distinct developments in the past five years have forced the Tatas to add fuel to their hitherto conservative strategy in the power sector. For, when BSEs' unit at Dahanu and Enron Corporation's Dabhol power plant went on-stream, the Tatas lost business from two of its major clients, BSEs and the Maharashtra State Electricity Board (MSEB). And when Reliance Industries announced a takeover bid for BSEs, there was a feeling within the Group that the three Tata Power companies could face a similar threat.

In fact, R. Gopalakrishnan, 54, Executive Director, Tata Sons, admits that the group has been risk-averse. So, on June 15, 2000, the Rs 33,000-crore Tata Group announced its intention to merge its two power companies-Andhra Valley Power and Tata Hydroelectric Power-with Tata Power. The merger will allow the Tatas to minimise a takeover risk and allow Tata Power to pursue major expansion plans including the acquisitions in existing independent power projects.

The merger will also allow Tata Power to emerge with a stronger balance-sheet, which will enable it to invest Rs 3,580-crore in the existing and new power projects. It will also help it diversify into new areas like liquefied natural gas, through its joint venture with the France-based Total Elf Fina, and provide broadband by using its existing fibre optics network of 400 km, which will be completed in nine months. Later, it will also set up private Net gateways and offer a spectrum of services like B2B and B2C e-Commerce.

The merger dynamics

The Tatas gameplan in power

Merge the three power companies, which will allow the group to undertake large projects.

Repower the Trombay unit, which will increase its capacity from 520 MW to 725 MW.

Reach out to more bulk consumers like commercial centres and large housing schemes.

Set up new capacities like Jojobera (240 MW) and Wadi (37.5 MW)

Diversify risks by acquiring interests in IPPs outside Maharashtra.

Leverage its 400 km of optic fibre network & 1,200-km of right of way to offer broadband services like B2B & B2C e-commerce, VoIP, video streaming, video conferencing, and net hosting.

Integrate backward into LNG through a 6-million tpa terminal at Trombay.

Post-merger, the new Tata Power would have an asset base of Rs 6,194 crore, a net worth of Rs 2,589 crore, and a book value of Rs 115 per share. The financial muscle would help it negotiate strategic alliances or bidding for independent power projects. Explains Adi Engineer, 62, Executive Director, Tata Power: ''We want to reposition ourselves as a power and related infrastructure company.''

Don't forget that the Tatas have chalked out a huge investment plan over the next two years. That includes the expansion of the Jojobera captive power unit (Rs 1,020 crore), and the 1,000-mw Mangalore power project (investment: Rs 520 crore) in which the Tatas would replace Cogentrix in a 30:60:10 joint venture with China Light & Power and General Electric. Says C.R. Vevaina, 50, Executive Director, Tata Electric, an informal entity used to refer to the three power companies: ''These are firm proposals and most of the money has already been provided for.''

That apart, the Tatas have evinced an interest in entering the M&A game. While the Tatas refuse to talk about it, BT learns that they are in the process of negotiating with the US-based Powergen to buy back its stake in the 655-mw Torrent Power and the 578-mw Bina project, and are trying to grab a majority stake in the 515-mw Essar Power. The only criteria, according to Engineer, is that such projects ''should be viable and located preferably in states having progressive policies in place.'' But, as long as the SEBs are bankrupt, none of these projects is likely to take off.

The proposed merger will make it tough for any predator eyeing the three power companies. Pre-merger, a 20 per cent stake in Andhra Valley Power would have cost about Rs 61.78-crore based on a 40 per cent premium over the scrip price of Rs 39 on June 2, 2000, respectively. But, once the merger process is complete, the cost of a similar stake in Tata Power would be around Rs 490 crore, based on the swap-ratios announced by the Tatas and a similar premium over the company's scrip price of Rs 85.90 on July 10, 2000.

What's also important is that the Tata's decision to merge the three power companies has created an excitement among investors, forcing all the three scrips to perk up. For instance, the Tata Power scrip bounced up from Rs 65.60 on June 15, 2000, to Rs 90.55 within five days. If the upward trend continues, taking over the merged entity would prove to be more expensive and difficult. Explains Mahesh Patil, 31, Senior Analyst, Motilal Oswal Securities: ''The Tatas now have a 26 per cent stake in the company. It does not make sense for anyone to make a takeover bid although there is a tremendous difference between Tata Power's intrinsic value and scrip price.''

The new-found aggression

What explains the group's new thrust on power? Especially as the Tatas were conspicuous by their lack of interest in any of the fast-track projects in the early 1990s? Explains Engineer: ''We had our commitments. Besides, we were not sure of the payment terms. We did not want to dilute our shareholder value.'' But another dimension to the truth is that a number of events forced the hitherto conservative group to wake up from its slumber.

For instance, when BSEs, a major customer, commissioned its 500-mw Dahanu plant in 1995, Tata Electric's sales to BSEs declined from 4,493 million units in 1995-96 to 2,370 million units in 1999-2000. Not surprisingly, Tata Power's revenues stagnated.

The problem is compounded by the fact that foreign power companies as well as domestic newcomers have sprinted ahead of the Tatas in the power sector. Explains Harry Dhaul, 49, President, Independent Power Producers Association of India (IPPAI): ''Their (the Tatas') share has shrunk. In value-added services, they have been outsmarted by BSEs. They have to get back some of the lost glory.'' Which is exactly what the group is trying to do through the proposed merger.

Consider Tata Electric's proposed forays to take advantage of the convergence between telecom and power. While its fibre-optics cable will run through the heart of Mumbai, the group has the right of way for another 1,200 km in the city. But Tata Electric will have to compete with BSEs, which is trying to build its own fibre-optic backbone in the city.

At a national level, broadband services are likely to witness major competition among the key players involved. Clearly, the Tatas would be perceived as late-comers in taking advantage of the potential in the power sector and the New Economy. But it's better late than never, for this is the right time to make strategic investment decisions as the power sector is undergoing a minor shakeout and the New Economy offers tremendous synergies. Only if the current plans succeed, can Tata Electric power ahead of competitors like BSEs, Enron, and the Ahmedabad Electricity Company.

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