India's GMR in $1.1 billion power acquisition

GMR Infrastructure buys 50% of the power generating firm InterGen from AIG Highstar in a deal that analysts have termed low-risk but expensive.
IndiaÆs GMR Infrastructure has bought 50% of InterGen from AIG Highstar for an equity value of $1.1 billion, in the largest ever acquisition of a global energy utility by an Indian company.

InterGen currently has $4.3 billion of debt on its books, suggesting GMR has ascribed a firm value of $6.5 billion to InterGen. The debt is non-recourse and was mostly syndicated in 2007. It does not have a change of control clause, say sources close to the deal.

InterGen has ownership interests in 12 operating power plants (including one power plant under construction in the Netherlands) with gross capacity of 8,258MW and a further 4,822MW of assets under development. Its business is spread across the UK, the Netherlands, Mexico, Australia and the Philippines. On a per megawatt basis GMR is paying $360,000 per MW. The transaction is expected to close in the third quarter of 2008.

The remaining 50% of in InterGen is owned by Ontario Teachers Pension Plan, the largest single-profession pension plan in Canada with C$108.5 billion ($107.1 billion) in net assets and C$8.8 billion invested in infrastructure and timberlands as of December 31 2007.

ôWith seven of the company's projects (including the one under construction) operating under long-term power purchase or tolling agreements, 76% of the company's capacity is low risk,ö notes a Morgan Stanley research update on GMR issued on June 26. Morgan Stanley goes on to note that 84% of InterGenÆs revenues between 2008 and 2010 are protected. But the bank comments that the price GMR has paid for InterGen is expensive based on trailing 2007 financials, at a firm value to Ebitda multiple of 10.7 times, a 22% premium to the average valuation of global peers at 8.8 times and a price-to-earnings multiple of 21.3 times, a 28% premium to the 2007 global peer average of 16.7 times.

GMR is a Bangalore-headquartered infrastructure group with interests in airports, energy, highways and urban infrastructure. It operates three power plants and is developing a further six and has two road projects in operation and four under development. In the airport sector, GMR recently completed a greenfield international airport at Hyderabad and is currently modernising the existing Delhi international airport, as well as building a new terminal in Delhi. It is also upgrading the Sabiha Gokcen International Airport in Istanbul, Turkey. GMR will route the acquisition through a Malta subsidiary.

InterGen was formed in 1995 as a JV between Bechtel and PG&E Corp. In 1997, Bechtel purchased PG&EÆs interest in InterGen and later that year sold a 50% interest to Shell Generating. In 2005, Shell and Bechtel sold InterGen to Highstar and OTPP.

Highstar is an infrastructure investor that currently manages over $4.5 billion of capital commitments from institutional investors globally. Lehman Brothers ran an auction for HighstarÆs stake in InterGen which elicited interests from strategic investors both in Asia and Europe as well as infrastructure funds in Europe and the US. Strategic investors said to be bidding in the auction included a consortium of MalaysiaÆs Khazanah, Tenaga and Tanjong.

GMR was advised by NM Rothschild. The Indian company will raise debt to finance the deal from Axis Bank, which will subsequently be refinanced, say specialists.
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