Debt-riddled GVK reaches out to JSW Group for sale of its Mumbai and Bengaluru airports
GVK is among the most indebted infrastructure conglomerates in India. Net group debt at the end of FY15 stood at Rs 26,500 crore.
GVK – among the most indebted infrastructure conglomerates in the country with Rs 26,500 crore net group debt in FY15 - has been exploring several strategic options which included listing its airport vertical or sell a minority 49 per cent at its airport holding company to investors or even an outright sale of its economic interests in the Bangalore airport for months. Last year it even mandated investment banks Bank of America Merrill Lynch and Goldman Sachs for the exercise that would have helped retire Rs 3500 crore debt in the vertical and prune group operations, already hobbled with coal-mine acquisition debt and low profitability of its power plants.
GVK’s airport segment clocked revenues of Rs.2459.42 crore in FY15 or 80.65 per cent of the group’s total income.
As per investment banking sources, the feelers to Jindal come at a time when the company has also received competing proposals from a diverse set of candidates including German airport AviAlliance, Singapore’s Changi, IDFC Private Equity while a consortium of investors led by the family office of a Bangalore based tech businessman and philanthropist is also believed to have shown interest for the Bangalore asset. But GVK’s proposal to JSW involves a complete sale.
JSW spokespersons declined to comment on speculation. GVK spokesperson did not respond to ET’s email questionnaire.
GVK Airport Developers, a wholly owned subsidiary of the listed GVK Power & Infrastructure, owns a majority 50.5 per cent stake in Mumbai International Airport Ltd (MIAL) and 43 per cent in Bangalore International Airport Ltd (BIAL). It also has the right of first refusal for a second airport that is being planned for Mumbai. Additionally, the company is developing a greenfield airport and managing the commercial operations of another in Indonesia.
For JSW, infrastructure has been a growing play across power, ports and even cement. But even then, people in the know see this as a "one-off opportunistic diversification." They add, the group is evaluating the prospects with the information shared by GVK management but is yet to start a formal due-diligence.
"Airports are iconic assets that act as gateways to key cities. So this is a unique opportunity for the JSW corporate brand perceived largely as industrial in nature to change into one with strategic consumer connect and visibility. Airports also offer a steady income even though they regulated," said one of the people mentioned above on condition of anonymity as the talks are still in private domain. The prized assets can also help Jindal list his privately held ports company JSW Infrastructure, the likely vehicle for this acquisition, in future.
However they cautioned, these discussions are still preliminary in nature.
Moreover, the equity valuation that GVK is expecting for the entire vertical is believed to be at around Rs 10,000 crore ($1.5 billion) and is significantly higher than what most suitors including JSW is willing to pay. This alone can potentially break the discussions. "JSW is keen to engage but not at the valuations that GVK is seeking. Jindal has always been a value buyer and he will not pay a premium," said another person in the know.
Such valuation is also significantly higher than the current market capitalisation of GVK Power and Infrastructure Ltd (GVKPIL), the listed parent company that on Wednesday stood at Rs 1,061.23 crore. In the last one year, GVK stock is down 31.2 per cent versus the 19.2 per cent fall of the benchmark Sensex.
"Potential stock triggers include divestments of stakes in MIAL and BIAL / IPO of the airports vertical and improved gas availability. Pending visibility on the same, we maintain our Underperformer rating on GVK," wrote analysts from a domestic brokerage house after GVK’s Q3FY16 results earlier this month.
GVK's house of debt
The urgency to reach a deal, said analysts, is more from GVK's side. Since 2011, the group has been trying to monetise its airport investments or rope in a strategic partner. It has engaged with Changi several times in the past and also with global developers like Fraport or Zurich along with infrastructure focussed funds like Morgan Stanley Infrastructure Partners, JPMorgan Asian Infrastructure Fund, SBI Macquarie but valuation mismatch has always been a deterrent.
They have been are reluctant sellers but now they have limited choice, said an infrastructure analyst. Over the last few years, GVK has increased its equity holdings in the two airports from earlier partners like L&T, Siemens, Bid Services Division Mauritius by raising debt. Additionally the power portfolio — another cash guzzler — has also become a huge drag with low plant load factors and unavailability of natural gas feedstock.
Group debt levels though has seen a continuous rise, up 10 per cent in FY15 and up 5x over the past four years. The only positive catalyst has been the strong passenger growth in the airports up 7.7 per cent and 10 per cent in Mumbai and Bangalore respectively since 2009. As per the calculations of Airports Economic Regulatory Authority (AERA), MIAL is likely to witness a compounded annual growth rate of 7.73 per cent in the domestic passenger segment and 6.78 per cent increase in the international passenger segment for five years from FY15.
"Given the macro and micro trends the short and medium term prospects (for airports) appear bright. Airports are likely to gain both from growth in traffic and non-aeronautical revenue", says Amber Dubey, partner and head-aerospace and defence at global consultancy KPMG.
BIAL, the profitable of the two airports, now has a built capacity to cater to 20 million passengers annually but upon completion of its expansion plans the number can go up to 50 million. In FY15, 15.4 million passengers used the airport which also handled .3 million metric tonnes (MMT) of cargo. In comparison MIAL’s capacity is 40 million passengers but already in FY15, it has handled 36.6 million passengers and .7 MMT cargo. Both the airports also have land bank – 515 acres in Bangalore and around 200 acres in Mumbai – that are yet to be developed.
But MIAL’s revenue accruals and profitability is slated to grow after AERA gives its nod to a proposal to implement additional development fees on passengers. The airport currently levies Rs 100 per domestic passenger and Rs 600 per international passenger and has sought a hike of Rs 50 and Rs 100 for the two respective segments. The total project cost for developing the Mumbai airport is at Rs 13,050 crore, which includes the building of a brand new terminal which will integrate domestic and international operations.
In its previously approved 23 month control period —a fixed time an airport levies development fees on passengers to plough back its investment costs — AERA had allowed MIAL to raise Rs 3,400 crore as development fees to fill the gap in its investment in the airport and returns thereof. The control period ended in March 31, 2013. The cap mandated by AERA left a funding gap of Rs 1,347 crore, which MIAL raised through loans.
Furthermore, MIAL is contributing Rs 518 crore towards the development of the two metro rail stations, one of which, in an advanced stage will connect the city to the airport. MIAL’s proposal for the increased development fees to fill this gap has been pending with the government for the last several months.