GMR Infrastructure raises $315 million from QIP

Supported by a few anchor investors, the Indian infrastructure company is able to upsize the deal by 26% – reversing a negative trend that has surrounded the stock since it cancelled a QIP in June last year.

GMR Infrastructure, which owns stakes in airports in India and Turkey as well as roads and power assets, has raised $315 million from a qualified institutional placement. The deal, which was completed Friday morning India time, is the largest equity fundraising by a private sector Indian company this year and comes nine months after the company last tried to sell new shares.

Back then, on June 29, 2009, the company had lots of competition with six other Indian deals in the market on the same night. GMR's issue was the largest at $500 million and failed to generate sufficient demand, even though no fewer than eight investment banks were involved in the transaction. And since a reduced issue wouldn't have met the company's capital requirements, it decided to pull the deal altogether and wait for a more suitable time. The other six deals in the market were all completed, either on the night of their launch or the following day.

The decision to pull the deal meant that GMR's share price has remained under pressure, with investors anticipating that another deal could come at any time. Indeed, the acquisition of more power and road assets since has been a clear sign that the company would eventually need more capital. The share price fell 8.5% the day after the placement was launched in June, which was in line with the 8.3% QIP discount, and another 1.2% the following day after it was decided the deal would not go ahead. By Thursday last week it had lost 17% versus the last closing price before the June deal was announced -- a significant underperformance versus the overall market, which has gained 22% in the same period.

The fact that the share sale has now finally happened should help to halt this negative trend, although it remains to be seen whether it is sufficient enough to reverse it.

For one, last week's fundraising was a lot smaller than the initial plans, even though it was increased from a base size of $250 million. Size was likely a secondary consideration, however. The most important thing would have been to ensure that the deal didn't fail a second time. Also, the need for cash was reduced somewhat earlier this month when Temasek agreed to invest $200 million in its power unit, GMR Energy, through a structured note that is compulsorily convertible into equity.

Contrary to last time, the company decided to employ only one bank to do the job and three months ago gave the mandate to Bank of America Merrill Lynch. Since then, the US bank has been working on improving the company's image and to reposition the story. It also identified a select group of investors and anchor investors who would be willing to support the transaction and took the management on a three-day marketing trip with stops in Asia, Europe and the US.

According to a source, the base deal size was fully covered at launch, and the company used the excess demand to upsize the deal as much as it could. In all, about 30 investors participated in the transaction. Clearly, the decline in the share price over the past nine months has brought the valuation to more attractive levels, but analysts are still not convinced. Of the 25 analysts who cover the stock, only seven have a "buy" on it. Another seven recommend investors to hold, while 11 analysts have a "sell" on it.

The upsized deal comprised 225 million shares and accounted for 6.1% of the existing share capital and about five days' worth of trading volume. The shares were offered at a fixed price of Rs62.20, which was largely in line with the floor price of Rs62.13. Based on Thursday's closing price of Rs63.95, that gave a discount of 2.7%.

At such a tight discount and with the history of a failed QIP behind it, this clearly wasn't a momentum play and about 95% of the deal was bought by long-only investors who have a belief in the fundamentals of the company and the equity story. About 88% of the demand came from international investors, while the remainder was contributed by domestic Indian accounts.

As is often the case these days, the QIP was launched after the Indian market closed on Thursday, but was kept open until Friday morning to allow investors in all jurisdictions enough time to take a look at the offering.

The initial reaction to the offering was quite positive, with the share price falling only 1.4% on Friday -- well below both the QIP discount and the dilution as a result of the sale.

GMR is planning to enhance its installed power generation capacity to more than 6,500MW over the next three to four years from the current 808MW, thus necessitating significant capital investment. The company has already achieved financial closure and fuel linkages for GMR Kamalanga (1,050MW) and Emco Energy (600MW) and several other projects are in the advanced development stage.

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