For GVK Power investors, Hancock’s a raw deal

The much-hyped acquisition of Hancock coal projects could leave a bitter aftertaste for shareholders of GVK Power and Infrastructure Ltd.

The company holds only 10% stake in the projects, while the rest is held by GVK Coal Developers (Singapore) Pte Ltd, a subsidiary of GVK Natural Resources Pte Ltd, which is owned by the promoters of GVK Power.

However, it stands guarantee to 49% of the loan outstanding for making the acquisition.

For the record, GVK group plans to fund the acquisition through a mix of debt and equity. The initial payment of $500 million will be funded with a loan availed by GVK Coal Developers. The security for this loan comprises the assets of the Hancock mines and security provided by GVK Natural Resources and GVK Power in 51:49 ratio, respectively.

“For 10% stake, we think providing guarantee for 49% of the outstanding facility is excessive. GVK Power will pledge the shares of GVK Energy Ltd and GVK Transportation Ltd to secure the equity requirements of the projects including debt service requirements,” Krishnakant Thakur and Pawan Parakh, analysts with Espirito Santo Investment Bank, said in a report on September 19.

Of course, GVK Power, the group’s lone listed entity, has an option of increasing its holding in the Hancock coal projects to 49%.
However, this would mean additional outflow of funds towards equity infusion.

The GVK group has already indicated selling stake in GVK Coal Developers for raising about $1 billion towards repayment of debt incurred on acquiring the Hancock mines. It is said to be in talks with some prospective investors including the existing coal customers of Hancock for dilution of stake.
“We still don’t know how GVK Power fits into the larger plan of raising funds. The dilution of equity is likely to happen at GVK Coal and GVK Power holds (10%) equity in the projects,” said a source tracking the developments.     Turn to Page 8