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Hancocked And Loaded

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After months of intense speculation, Hyderabad-based GVK Group has closed the deal with Australia's Hancock Coal. The company has confirmed the acquisition of the coal and infrastructure projects of Hancock — owned by Australia's richest woman Gina Rinehart — for $1.26 billion on 16 September. The news has effectively ended the debate over which Indian major would win this race. But new concerns are emerging over GVK's ability to pay.

The deal is being financed by $1 billion in debt and $260 million through equity. But before the celebrations begin, take a breather. The company, it appears, may be hard-pressed to cough up the sum which is evident in the phased method of payment — $500 million payable now; $200 million a year from closing the deal, and $560 million upon financial closure (expected to be in 2012). In today's tight credit market, a highly leveraged balance sheet — most other infrastructure firms are in similar shape — is never a good thing.

The cash-strapped GVK Group already has several projects across many verticals, with a number of them still in the investment phase. How will the firm prioritise? "We will cross the bridge when we come to it," says Isaac George, CFO and director of GVK Power and Infrastructure.
However, analysts at Religare Capital Markets question the 49 per cent guarantee by GVK Power given the fact that it has only 10 per cent equity stake in the projects.

"There have been no complaints from our investors and I don't see the need for anyone to indulge in speculation," says George. GVK Power has the option of increasing its stake in the acquisition to 49 per cent (though this is subject to approval from Australia's Foreign Investment Review Board).

On top of the money it needs to put together to meet the first payment, GVK Power will need to invest a further $10 billion for the first phase of the project's development (developing the mines, building the railway lines and the port infrastructure). Without naming any, George says there are a number of strategic investors with interests in coal mining that are keen to pitch in.

"The investment will be funded by maintaining a 70:30 debt-equity ratio," he adds. "Some Australian and European banks have shown an interest." Tapping Indian banks is also a possibility, but George acknowledges that they might not like to take non-recourse finance risks in another country.

With this acquisition, GVK Group now has access to one of the largest integrated coal projects in the world with possible reserves of 7.9 billion tonnes of coal. At full production levels, the three projects are together expected to supply about 84 million tonnes per annum for exports. This is also the only project in the Galilee Basin to have a rail declaration and a port allocation.

But here is a nagging question: most acquisitions of coal mines overseas by others such as the Tatas, the Jindals and the Adanis have been for captive use. Most of the coal from the project would be supplied to major utility companies in Asia, which is not infrastructure development.

"Acquiring coal assets makes good business sense, but how they structure the financing and the parent company implications remain to be seen," says Dipesh Dipu, director of energy and resources consulting, Deloitte Touche Tohmatsu India.

Coal is on the verge of becoming another asset class like gold with many planning investments in coal mines in various parts of the world. The GVK Group may just be the latest big investor in what is now a lucrative commodity.

Hopefully, this ‘black gold' mine will not give GVK a financial black eye.

(This story was published in Businessworld Issue Dated 03-10-2011)