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PFC on REC buy: Can’t shell out more than Rs 12,000 crore

Anupam Chatterjee,Prasanta Sahu

The proposed purchase of the Centre s 52.63% stake in REC by state-run Power Finance Corporation (PFC) is facing a hurdle with the latter putting a ceiling of `12,000 crore for its transaction cost, against `15,000 crore the government hopes to garner from the deal, sources told FE. The current market price of the Centre s stake in REC is worth `14,300 crore (on the BSE).

The deal, which was expected to close by February end, is facing delays also because REC s dollar bondholders are yet to commit to forgo their rights to sell the bonds back to REC if the government ownership falls below 50%. On REC s overseas debt outstanding of $1.8 billion, the bondholders are demanding $150 million in fees for the waiver, much higher than the offer made by REC, said one official aware of the matter.

What is further undermining PFC’s ability to finance the deal is that the share price of REC has jumped by 32.1% from `103.95 on December 6, 2018, the day Union Cabinet gave approval to the stake sale in the company, to `137.3 on March 4, 2019. The rise in share price has increased the value of the government’s stake in REC by a tidy sum of `3,468 crore.

In a similar PSU-to-PSU deal last year, ONGC had paid `36,915 crore for the Centre’s 51.1% stake in HPCL that was over 10% higher than the 60-day weighted average of the scrip. So, the government expects a premium on the weighted average price of REC.

PFC and the government will have an arm’s length distance on the price bid. We will assess the bid on the basis of valuation, said Atanu Chakraborty, secretary, the department of investment and public asset management (DIPAM).

The deal, which will materialise later this month, would make a major contribution to the Centre s disinvestment kitty this fiscal, the target for which is `80,000 crore. The acquisition is likely to be majorly funded through internal accruals while small part via debt, the source said.
The rise in REC share price has discomforted PFC, said another official aware of the matter. An email sent to PFC was not answered till going to the press.

Critics of the deal had flagged three consequences of the deal for PFC a possible rating downgrade, capital erosion and worsening of debt-equity ratios depending on the structure of the deal. The acquisition will also restrict the leeway of lenders such as LIC or banks or mutual funds to invest in these firms the lending threshold in a group company (PFC) will be breached much faster than in these as independent companies.

Sources added that despite spending such a large sum, PFC won t get the tag of the promoter of REC and the government would continue to hold the status to soothe its overseas bondholders.

Depending upon the amount of investment and portfolio growth in H2FY19, the Tier I % for PFC could come under further pressure, rating agency Icra said in a recent note. However, it is likely to remain above the regulatory threshold of 10%, Icra added. In FY18, PFC reported a net profit of `5,855 crore against `2,126 crore in FY17. As on September 30, 2018, PFC had a total loan book of `2,92,648 crore. In FY18, REC reported a net profit of `4,647 crore on an asset base of `2,46,484 crore against profit of `6,246 crore on an asset base of `2,09,236 crore in FY17.