5 investors may join Brookfield for East West buy

MUMBAI: A set of marquee asset management companies, family offices, banks and insurers are said to be interested in participating in the Brookfield-led infrastructure investment trust (InvIT) that is buying the lossmaking East West Pipeline Ltd (EWPL), earlier known as Reliance Gas Transportation Infrastructure Ltd, for an enterprise valuation of Rs 13,000 crore ($2 billion).
ICICI Prudential Asset Management Company and the family office of the Poonawallas of Serum Institute are likely to join the Canadian investor in India Infrastructure Trust, the vehicle that is being created for the acquisition to take over the 1,400 km common carrier pipeline from Kakinada on the east coast to Bharuch in Gujarat, said people aware of the development. Three or four more ultra-high net worth individuals like Uday Kotak or their family offices too are expected to join the consortium, added the people mentioned above.

Negotiations are believed to be ongoing to include private sector banks like ICICI or state-run Bank of Baroda too. This will be the first time a private pipeline is getting monetised in India.

The Securities and Exchange Board of India (Sebi) is expected to give its approval in the coming weeks, following which the InvIT will get formed and the much-awaited transaction will close this month end. The Competition Commission of India had approved the transaction in September 2018.

The Rs 13,000 crore will be evenly split between equity and debt. Axis Bank and ICICI Bank are providing the financing. The other investors together are likely to put in Rs 1,000-1,200 crore as equity contribution and will own 10-15% of the asset. Of the five, the two financial institutions are contributing the maximum. Brookfield will remain the sponsor with an 85-90% economic interest and will run the asset for 20 years.

As part of the agreement, Reliance Industries Ltd will buy back the asset after 20 years, said the sources. The company will also sign a commercial agreement with Brookfield assuring a volume commitment—a take or pay contract in industry parlance—based on which the cash flows and returns calculations have been made. Analysts estimate that the steady cash-flow generating business should yield a 12-13% internal rate of return (IRR), excluding leverage.

Sebi guidelines stipulate at least five non-sponsor investors or unit holders for privately placed InvITs. The instrument will be listed but privately placed to institutions and HNIs, much like listed nonconvertible debentures. “It is listed technically in the form of a stock exchange registration but there is no trading as only four-five people own it,” said an executive on condition of anonymity.

The pipeline housed under EWPL is being transferred to an entity called Pipeline Infrastructure Pvt. Ltd (PIPL), a wholly owned subsidiary of Reliance Industries Holding Pvt. Ltd (RIHPL). That’s a holding arm of Mukesh Ambani and his family, the promoters of Reliance Industries Ltd (RIL).


EWPL has built and operates the critical pipeline to transport natural gas produced by Reliance-BP from the Krishna-Godavari (KG) basin on the east coast and links to users on the west coast. It also transports gas from other sources including RLNG (regasified liquefied natural gas) terminals along the stretch of the pipeline and is connected to pipelines of other operators such as state-run GAIL (India) Ltd and Gujarat State Petronet Ltd for onward delivery nationwide.

Reliance, ICICI Prudential, Bank of Baroda and Kotak didn’t respond to queries. Brookfield and the Poonawallas declined to comment. JM Financial and Ambit are advisors to the transaction. ET was the first to report on the transaction in its September 17 edition.

UNIQUE DEAL
The Poonawallas of Serum Institute, India’s leading vaccine maker, have been investing in real estate, equities and art to deploy the family wealth, estimated at $8.3 billion. Adar Poonawalla, the family scion, has also been backing young companies like pharmacy chains Wellness Forever and microfinance company Svasti.

“For Mukesh Ambani, it’s a great way of monetising an asset and deleverage. Brookfield and the sponsors of the trust will get cash flows from the pipeline, which will give them their desired yields,” said a Reliance executive on condition of anonymity. “InvITs are tax-efficient vehicles. This will be a single-asset InvIT but Brookfield is keen to create an energy platform.” It has acquired a pipeline in Brazil for $5 billion.

EWPL had operational revenue of Rs 884 crore and posted a net loss of Rs 715 crore in the year ended March 2018. The company was bleeding due to high interest expenses, which were almost equal to its revenue, and depreciation costs. It had a total outstanding debt of Rs 12,715.5 crore as of March, a lion’s share of which is from the shareholders, while its plant, property and equipment had an asset value of around Rs 11,040 crore. EWPL had separately disclosed in a regulatory filing that it was hiving off its investment division to immediate holding company Sikka Ports.

The pipeline, Sikka Ports & Terminals Ltd (SPTL) and Reliance Utilities and Power Pvt Ltd (RUPPL) are key companies in Ambani’s privately held RIHPL Group and their operations are critical for Reliance Industries as they are closely integrated with its facilities in Jamnagar, Dahej and Hazira in Gujarat, and with its KG-D6 gas fields. The facilities cater exclusively to RIL’s existing facilities as well as its expansion in the petrochemicals and refining business.

“EWPL’s cash flow is sensitive to the volume of gas available for transportation. Low volume reduces capacity utilisation and revenue, thus impacting cash accrual,” said a Crisil note last November.

There has been a significant drop in RIL’s gas production from its KG-D6 block over the past few years, which has constrained its cash flows.