Sunday, August 26, 2012

Acquisition of Coal Mines rings Alarm Bells.

A handful of Indian companies that had together invested over $10 billion in acquiring 14 coal mines abroad are now worried after coal prices have dropped 40% in two years to about $80 a tonne.

For example, GVK Power and Infrastructure pumped in $1.26 billion to buy an Australian coal mine less than a year ago when coal prices were at $124 a tonne and Adani Enterprises put $2.68 billion on the table two years ago to buy another mine in the country when prices were at $95.47.

Acquisition of Coal Mines rings Alarm Bells.

"As we speak today, we are not seeing good times for coal globally," admits Lanco Infratech chairman L Madhusudan Rao. The Hyderabad-based builder of roads and bridges, which paid $750 million to acquire Australia's Griffin Coal in December 2010, has Rs 32,000 crore in debt and posted a Rs 442-crore loss last quarter. It is looking to sell non-core assets to lighten its debt burden.

"Of course, we will be worried if the stressed cycle (of low price and demand) continues," adds Rao. "If the situation persists for the next 4-5 years, then it's not a good situation to be in. Our view is that the current situation may probably last for the next 14-15 months."

"It can be a cause for concern for bankers as the stakes are too high," says Seshagiri Rao, joint managing director and CFO with the JSW Group. "If the ability to repay is reduced, bankers will resort to extreme steps to cover losses. But most such deals have covenants built in, that protect them (bankers) in the event of a major downside (in prices)," he adds.

Typically, banks press for shares in parent companies as a comfort in the event of an acquisition going wrong. The clause can be invoked if the price falls below an agreed level.


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