GMR: Announces Intergen sale - positive for Balance sheet: JPMorgan

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GMR Infrastructure Ltd Neutral
GMRI.BO, GMRI IN
Announces Intergen sale - positive for Balance sheet
and return profile


• GMR Infra has announced that it will sell its 50% stake in Intergen, to
China Huaneng group. The equity value of the sale is US$1.23B, as
against a consideration of US$1.135B paid by GMR to purchase the
same in 2008. Intergen holds a global IPP portfolio with assets in
Mexico, Netherlands, UK and Australia, with gross generation capacity
of 8.1GW.


• While the proposed sale appeared in media articles for the last few
months, the confirmation of the deal holds three key positives in our
view:
• (1) After repayment of acquisition debt of US$1B, it leaves GMRI with
equity surplus of US$225M, which the management intends to use
for infrastructure privatization opportunities in India. This would
improve the return profile, in our view. Given the government’s 12th
plan infrastructure investment target of US$1 trillion with private
participation of at least 50%, we believe there would be sufficient
opportunities for GMRI.
• (2) The acquisition debt would have led to a deterioration of GMRI's
leverage ratios, which this sale has averted. GMRI’s current consol.
DER stands at 1.86x, and a potential consolidation of Intergen would
have resulted in this ratio worsening to 2.25x.
• (3) Better investor perception: GMRI had suffered de-rating post this
purchase as its image of high-growth Indian infrastructure play had got
diluted.
• Clarity awaited on the mechanics of the deal: Currently, Intergen’s
stake is mainly held by GMRI’s promoters – this stake was supposed to
vest on GMRI via convertible debentures held by the latter. In our view,
GMRI would need to exercise its conversion option first for the
proceeds, including equity surplus of US$225M to flow into its balance
sheet. GMRI expects the deal, post approvals, to close in 1HCY11.