MUMBAI: Japanese financial services group Orix Corp may exercise its right of first refusal to acquire the renewable energy business of debt-laden IL&FS if bids in the auction process fall below the threshold price of Rs 2,300 crore, people directly familiar with the matter said.
Orix, the second-largest shareholder of IL&FS, bought a 49% stake in the clean power assets at the earlier-mentioned valuation in 2016 and has right of first refusal. Right of first refusal, which is incorporated in M&A deals, is a contractual right that gives the existing shareholder the option to first buy the assets before they are sold to a third party. Simply put, Orix wouldn’t sell its stake at a valuation below Rs 2,300 crore and could trigger the right of first refusal to buy out the asset.
IL&FS, a shadow bank led by a new board, is selling the green energy portfolio to pare its Rs 91,000-crore debt. IL&FS has an installed wind energy capacity of 875MW. It is selling assets to repay debts with select road assets and the renewables unit being the most likely to attract buyers.
However, lack of fresh capacity addition, relatively low plant load factor and mounting receivables from state utilities could drag the valuation, though the renewables unit reported an operating profit of around Rs 600 crore last fiscal. Orix, though a financial investor, would trigger the right of first refusal to protect its entry price into the renewable energy unit, especially after losing money in the parent entity, the people said.
Orix declined to comment on the report.
Several power companies, including state-owned players as well as financial investors, have been approached for the acquisition of the assets, TOI reported last week. Some of the strategic suitors are likely to pass the deal, given the sectoral uncertainties and declining valuations, sources said.
However, private equity investors and pension funds, which want a foothold in the Indian renewables space, are likely to place bids. IL&FS is open to selling the assets, either together or separately or in a combination. Besides wind, the IL&FS-Orix portfolio has some solar projects.
A diversified enterprise, Orix has interests in leasing, life insurance, real estate and corporate lending. It has pursued diversification in both — within its home country Japan and overseas. The corporate powerhouse has a large play in the renewables power business such as solar, biomass, geothermal and wind. In October, the government seized control of IL&FS by ousting the board and appointing a new one. By then, IL&FS’ debt had ballooned to over Rs 90,000 crore and it defaulted on some of its borrowings. Subsequently, the new board has initiated the sale of some of the firm’s assets, including road projects, education business and renewable energy to improve the balance sheet.