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Event: The GMR Group (GMR) has entered into an agreement to divest its 50% shareholding interest in InterGen NV (InterGen) to the China Huaneng Group (Huaneng), the largest power generation company in China, for an equity value of USD 1,232 mn. The deal is subject to regulatory approvals in each of the jurisdictions where InterGen has operations as well as approval of the Chinese government. The company expects the deal to achieve closure by Q1FY12. GMR had acquired 50% stake in InterGen NV in October 2008 for an equity value of USD 1,135 mn.
Our take: The management had indicated that it is in talks to sell its stake in InterGen for USD 1.3– 1.5 bn due to the solicited bids received in the recent past. This deal reemphasizes the company’s focus on enhancing the cash flow and operating profits rather than just focusing on asset creation and strengthening the balance sheet. Post IFRS (if GMR had not sold the InterGen stake), due to the leveraged buyout deal structure, the outstanding debt would have increased by ~ USD 1 bn, impacting the consolidated FY12E debt:equity further by ~0.5x to ~2.6:1. But due to this deal the consolidated debt:equity is expected to be ~1.8:1.
Impact on valuations: We had valued the InterGen stake at INR 3.4/ share and this deal is marginally lower than the same. We have reclassified our SOTP to enhance cash value and eliminate the InterGen valuation by a similar quantum; the same now stands at INR 63/share. We had recently upgraded our recommendation (‘Operating leverage to kick in’, Nov 25, 2010) due to the positive structural changes from both operational and financial perspective; the deal re-enforces our view. We maintain ‘BUY / Sector Outperformer’ view on the stock.
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