India's Reliance Power calls off hydro projects portfolio acquisition

The reason was apparently valuation disconnect.

As per a filing with the stock exchanges, Reliance Power (RPWR) has stated that it has terminated discussions with Jaiprakash Power Ventures (JPVL) for acquisition of the latter’s three hydropower projects (1791MW).

According to a research note from Nomura, this was on account of ‘prevailing regulatory uncertainties, tariff issued, which impact valuations’. Interestingly, in its filing with the stock exchanges on this development, JPVL has stated that the discussions were called off due to ‘the difference in commercial aspects and not attributable to any regulatory uncertainties’.

Putting this event in perspective, RPWR had signed an exclusive MoU with JPVL on 28 July 2014 to acquire three run-of-the-river projects – Baspa-II (300MW), Vishnuprayag (400MW) and Karcham Wangtoo (1091MW) – with an aggregate asset base of over INR100bn and asset life of over 50 years.

Here's more from Nomura:

At the analysts’ briefing following the announcement of the exclusive MoU with JPVL, the RPWR management had shared its philosophy behind the proposed asset buyout and broad contours of the deal; going by the same, the indicative deal value was pegged at a fairly attractive EV of INR67mn/MW vs a green-field hydropower project, which would typically entail an outlay of INR9-10mn/MW and a build-out timeline of 6-7 years.

JPVL’s INR31bn equity invested in the projects was valued at ~1.6x. In our view, as JPVL’s three hydropower projects and the prowess of the operational team are fairly well regarded, RPWR’s move to buy these assets and absorb the operational team would have made strategic sense:

[1] access to the expertise/experience of JPVL’s hydropower team would aid in the build-out of RPWR’s own substantial hydro project pipeline, and

[2] FCF augmentation ahead of RPWR kick-starting capex for building the next phase of its thermal/hydro project capacity.

While JPVL has ruled out regulatory uncertainty having any role in RPWR terminating the asset buyout discussions, we note:\

[1] as per recent reports (Economic Times, 19 Sep 2014), a committee with representatives from the Central Electricity Authority (CEA) and Central Water Commission has submitted a report stating that the company increased the capacity of its Karcham Wangtoo project to 1200MW vs the approved capacity of 1000MW, and

[2] the final tariff order from the Central Electricity Regulatory Commission (CERC) for this project is awaited.