Godawari Power’s Merger Bid To Boost Captive Power Capacity Gets A Setback

Godawari Power & Ispat Ltd.’s bid to secure a captive power plant received a setback after shareholders of the target company rejected the proposed merger with the maker of steel billets citing an unfavourable share-swap ratio.

In 2018, Godawari Power—to meet its long-term captive power needs—agreed to merge Jagdamba Power & Alloys Ltd. with itself. Jagdamba Power has secured coal linkages from South Eastern Coalfields. Godawari Power already has a 26 percent stake in Jagdamba Power.

This merger, the management said, promised uninterrupted power to the steel-making unit at competitive costs and was expected to increase capacity utilisation at the plant, leading to an operating leverage of at least 5 percent. The merger would have enhanced Godawari Power’s generation capacity to 98 megawatts,enough to cater to the company’s additional 25 MW of power capacity requirement to run its steel plant for making steel billets, according to its company filings.

Jagdamba Shareholders Unhappy

The shareholders of Jagdamba Power on Jan. 19 rejected the proposed merger citing an unfavourable exchange ratio, given that the shares of Godawari Power have tumbled almost 60 percent from the decided fair value of Rs 508 apiece. Based on its fair value, shareholders were promised 45 shares of Godawari Power for every 100 held in Jagdamba Power.

Godawari Power’s shares have fallen 20 percent since the development.

Godawari’s Financial Performance

Godawari Power turned around its business by restructuring debt. It reduced its debt-to-Ebitda ratio of 3.3 times in FY18 to 2.2 times in the second quarter of the ongoing financial year. This, however, will remain a key factor given that the company would incur a capital expenditure of Rs 60 crore to install new rolling facility. If the deal doesn’t go, the debt-laden company would have to spend extra money to source its power needs, its management told BloombergQuint.

With falling prices of steel and pellets, cost optimisation might not kick in anytime soon. After two years of losses due to falling pellet prices and high finance costs, the company returned to profit in 2018 due to debt restructuring and higher pellet prices.

Godawari Power’s Plan

Godawari Power’s board would meet by the end of the month to discuss the merger and the company would definitely like to work its way around the deal, Managing Director Siddharth Agrawal told BloombergQuint over the phone. Buying power from the state government would not be a feasible option for the company and the merger seems to be the only way towards cost optimisation, he said. The company expects an incremental Ebitda of more than 5 percent once the deal is through, he said.