Changing Hands

Weak balance sheets drive M&As in the sector

By Sarthak Takyar

The year 2018-19 saw a flurry of mergers and acquisition (M&A) activity in the Indian renewable energy sector. Multiple factors contributed to creating a favourable M&A environment as companies looked to demerge their liabilities and acquire well-performing assets to expand their portfolios for increasing operational efficiencies through economies of scale.

The surge in M&As can be attributed to the entry of a large number of global participants with deeper pockets, bigger appetites and the bandwidth to withstand profit margin pressures.

While the size of developer balance sheets has been increasing on account of winning projects at unrealistic tariffs, the depreciation of the rupee and the high cost of debt have made it hard for developers and independent power producers to remain profitable. These companies have ultimately become a target for M&As.

Key landmark deals

In financial year 2018-19, Renewable Watch Research tracked over 24 M&A deals worth close to Rs 323.17 billion. This excludes the acquisition of a 49 per cent stake by Royal Dutch Shell in Singapore-based Cleantech Solar for $100 million.

The acquisition of Ostro Energy by ReNew Power in April 2018 was the biggest transaction during the financial year, in terms of deal value and asset size. Valued at $1.63 billion, ReNew acquired 1,100 MW of Ostro’s assets — 850 MW of operational capacity and 250 MW of capacity under development. With this deal, ReNew Power’s total capacity stands at over 5,600 MW, the largest renewable energy portfolio in the country. The Canada Pension Plan Investment Board (CPPIB) had invested $247 million in ReNew Power to provide the capital required for the acquisition. Later, in May 2018, ReNew Power acquired a 100 per cent stake in Indian Energy Limited (IEL) for Rs 364 million. IEL owns and operates wind projects of a total capacity of 41.3 MW, installed at two sites in Karnataka and Tamil Nadu.

Meanwhile, a key development in the M&A space was the acquisition of Kiran Energy Solar Power by Hinduja National Power Corporation Limited for Rs 10 billion.

Another significant development was the on-again off-again acquisition of Delhi-based Orange Renewables by GIC Holdings and the Abu Dhabi Investment Authority-backed Greenko Group. In June 2018,

Greenko was set to announce its acquisition of Orange Renewables for an enterprise value of $1 billion. However, in August, the deal was called off. Later, in October 2018, Greenko did acquire Orange Renewables from Singapore’s AT Capital Group for about $925 million. Simultaneously, it signed an agreement to buy Skeiron Renewable Energy’s complete wind power portfolio (385 MW) for an enterprise value of about Rs 35 billion. Skeiron is a renewable energy platform set up by Suzlon Energy, Olympus Capital and Asia Climate Partners.

In October 2018, Caisse de dépôt et placement du Québec (CDPQ), a long-term institutional investor and pension fund company, increased its stake in Azure Power Global Limited to 40 per cent through a capital infusion of Rs 7.32 billion. Post acquisition, the total investment by CDPQ in the company stood at Rs 17.6 billion. In the same month, ThomasLloyd, a global investment and advisory firm focusing on the infrastructure sector in Asia, announced the acquisition of a significant stake in Delhi-based solar project developer SolarArise India Projects.

November 2018 saw some big-ticket deals being finalised. The first was the acquisition of the remaining 51 per cent stake in two solar projects owned jointly with the Suzlon Group by Canadian Solar for Rs 281.1 million. The companies had entered into a joint venture in 2016 to set up the two solar power projects – Amun Solarfarms Limited and Avighna Solarfarms Limited. Earlier, Canadian Solar had picked up a 49 per cent stake each in Amun and Avighna for a total of Rs 264.2 million. The solar projects have a capacity of 15 MW each and are located in Telangana.

In another deal in the month, Prism Johnson Limited agreed to acquire up to 30 per cent equity stake in a special purpose vehicle (SPV) that it had incorporated along with CSE Development (India) Private Limited (Cleantech) for approximately Rs 100 million. The SPV was formed to set up around 22 MW of captive solar power projects. In yet another deal, global independent power producer ENGIE acquired a 90 per cent stake in Simpa Energy from its parent company Simpa Networks. Simpa Networks is a distributed energy solutions provider with a pay-as-you-go pricing model for households and businesses.

And lastly, after engaging with ReNew Power early in the financial year, CPPIB was again in talks to increase its stake in the company. CPPIB intended to acquire a part of Goldman Sachs’ 48.6 per cent stake in ReNew Power. Apart from CPPIB, several other investors such as the Macquarie Group and the Ontario Municipal Employees Retirement System expressed interest in acquiring Goldman Sachs’ stake.

In December 2018, Hero Future Energies began talks to acquire solar power assets worth Rs 5 billion-Rs 5.5 billion from Waaree Energies Limited. Meanwhile, in the same month, CLP India Private Limited completed the acquisition of Tornado Solarfarms Private Limited, an SPV set up by Suzlon Energy for the development of a 70 MW solar project in Maharashtra. CLP acquired the remaining 51 per cent stake in Tornado for Rs 165.7 million. Earlier, CLP had acquired a 49 per cent stake in the SPV for Rs 159.2 million.

Prior to this, in September 2018, CLP India Private Limited had bought a 49 per cent stake in Suzlon’s Gale Solarfarms Private Limited for Rs 390.6 million.

The M&A market had a positive start in 2019. In January, Reliance Industrial Investments and Holdings Limited signed an agreement to acquire an 88 per cent stake in Kanoda Energy Systems Private Limited, which specialises in solar advisory, product design and technology validation. Kanoda Energy has also forayed into engineering, procurement and construction (EPC), and operations and maintenance of solar photovoltaic systems.

AMP Solar, a Canadian renewable energy developer, completed the acquisition of Rudra Solarfarms, an SPV of Suzlon, for Rs 142.1 million. The SPV was created to develop a 15 MW grid-connected solar project at Achampet, Telangana.

Adani Green Energy Limited (AGEL) acquired the remaining 51 per cent equity share capital of Kodangal Solar Parks Private Limited (KSPPL) from FS India Devco Private Limited in the 20 MW solar power project located in Bagewadi, Karnataka. With this, KSPPL became a wholly owned subsidiary of AGEL.

Meanwhile, Global Infra Partners, KKR, Brookfield, I Squared Capital and Macquarie were among the 15 large investment firms that were reportedly in the race to buy over 1,000 MW of renewable energy assets of the debt-laden Infrastructure Leasing & Financial Services Limited.

In February, EverSource Capital, a joint venture among Everstone Capital, Lightsource BP and the National Investment and Infrastructure Fund of India, acquired a significant stake in Ayana Renewable. Earlier, in April 2018, EverSource Capital had launched the Green Growth Equity Fund with a target to raise £500 million.

Just before the end of the financial year, Suzlon Energy sold its majority stakes in SE Solar and Gale Solarfarms for Rs 765.5 million and Rs 225.4 million respectively to CLP Wind Farms. It had set up these subsidiaries in partnership with CLP India for a 100 MW solar project in Telangana and a 50 MW project in Maharashtra. In April 2019, Petroliam Nasional Berhad (Petronas) completed the acquisition of Amplus Energy Solutions, previously owned by I Squared, for an undisclosed amount.

Market outlook

The general belief is that the renewable energy sector will see a big wave of consolidation not only at the parent company or subsidiary level, but also at the project and asset level. The consolidation drive is expected to continue at least until the cost pressures subside and a stable business environment is created. However, according to another school of thought, only severe distress in the market can speed up the pace of consolidation and that could be a few years away. Till then, the market will see fewer M&As.

The future of the M&A market hinges on both microeconomic and macroeconomic variables. Greater policy stability with a spike in tendering activity in which both small and big players win projects may lead to less consolidation activity. The discovery of low tariffs and the high cost of imports reduce the internal rate of return. This, coupled with macroeconomic risks such as high-cost capital and the depreciating rupee, will result in low profitability for developers, leading to greater consolidation in the sector.


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