Power Co., India's second- biggest utility by sales, agreed to pay $1.3 billion for a 30 percent stake of two coal mining units in Indonesia to secure supplies of the fuel.
PT Bumi Resources, Asia's third-largest coal miner, will sell stakes in PT Kaltim Prima Coal and PT Arutmin Indonesia, Dileep Srivastava, Bumi's head of investor relations, said today in an e-mail from Jakarta.
Chairman Ratan Tata is expanding the group's 96 companies, which control about 3 percent share of India's $854 billion economy, to build a global brand and spread investment risks. Analysts say the latest buy, aimed at securing coal supplies, maybe expensive for a $222 million profit-making company.
“Tata Power is clearly overpaying,'' said Madhukar Sheth, a stock trader at Amax Network Pvt. Ltd. in Mumbai. “The current valuations suggest that the investment will yield about 5 percent return, which is nothing in an inflationary economy like Indonesia's. Tata Power stock may not react favorably.''
Tata Power's acquisition comes with an entitlement to purchase 10 million metric tons of coal from one of the mines, securing supplies of the fuel for its power plants coming up on India's west coast. The new plants are part of Tata Power's $4 billion expansion plan to double power generation capacity to more than 4,500 megawatts.
`Secures Fuel'
“This move secures our fuel requirements in light of the aggressive growth plans charted out by the company,'' said Prasad R. Menon, managing director of Tata Power. “It also opens up opportunities for Tata Power to own and operate a range of world class energy business in India and overseas.''
Tata Power will pay $1.1 billion for Bumi's units “prior to working capital and other adjustments,'' the company said in a statement from Mumbai. Bumi's Srivastava said the working capital will amount to at least $200 million.
Asian thermal coal prices have risen on supply constraints and higher demand from China. Chinese thermal coal imports rose by 28 percent year-on-year in January, the Beijing-based Customs General Administration said Feb. 28.
The Kaltim Prima mines are 50 kilometers (31 miles) north of the equator on the east coast of Kalimantan, in Indonesian Borneo. The mines hold 3.56 billion tons of coal reserves, according to the company's Web site. Arutmin operates four open-pit mines in the southeastern portion of Kalimantan.
Tata Power shares have declined 11 percent on the Bombay Stock Exchange in the past year, even as the benchmark Sensitive stock index gained 16 percent during the period.
`Stock Should Recover'
“The stock should recover,'' said K. K. Mittal, who helps manage 2 billion rupees ($46 million) of stocks at Escorts Asset Management in New Delhi. “The stake purchase will ensure assured coal supplies, which is vital for power companies.''
The Tata group has spent almost $14 billion in the past two years to acquire companies overseas.
Flagship company Tata Steel Ltd. this month completed a $12 billion takeover of U.K. steelmaker Corus Group Plc, catapulting the company up world rankings to become the sixth- largest steelmaker, from 56th.
The group's previous overseas acquisitions include Tata Steel's purchase of Singapore's Natsteel Ltd. in August 2004 for 13 billion rupees ($287 million), and Thailand's Millennium Steel Pcl for 18.2 billion rupees in December 2005.
Tata Tea Ltd. bought the U.K.'s Tetley Group Plc for $407 million in 2000 and followed it with a $677 million purchase of a 30 percent stake in U.S.-based Energy Brands Inc., also known as Glaceau. The group's hotels unit, Indian Hotels Co., last year bought the Ritz-Carlton hotel in Boston for $170 million.
Bumi to Repay Debt
Bumi plans to use the proceeds of the sale to pay off about $1 billion of debt, the company's commissioner Nalinkant Rathod said on March 5. Improved finances will enable Bumi to expand, analyst Julius Sianipar said.
“A lower debt-to-equity ratio will make it more flexible for Bumi in future expansion,'' Sianipar, head of research at PT Dhanawibawa Artha Cemerlang in Jakarta, said. “The sale is positive for its future earnings and the company's valuation.''
Bumi, which bought the coal miners for about $685 million, is realizing gains in the value of the mines and keeping a majority stake in the two companies as demand for energy surges in India and China. Rising prices of the fuel have pushed Bumi's shares to an 88-fold gain since October 2002, when the company transformed into a coal producer from a property developer.
Bumi's Rathod said earlier this month the company plans to boost production of coal by 50 percent in the next three years.
`Finest Coal Assets'
Kaltim Prima and Arutmin are “some of the finest coal assets in Asia,'' Ahmad Solihin, an analyst at PT Mandiri Sekuritas, said on March 22. “There's still a lot of upside potential in production.''
Tata Power beat six other bidders, including India's Reliance Energy Ltd., to buy the stake. Bumi decided to sell part of its stake in the coal mines after it failed to raise $3.2 billion through a share sale last year. Bumi had wanted to use some of the money to build plants that produce diesel from coal and crops such as palm oil.
Coal miners in Indonesia, which in 2005 overtook Australia as the world's biggest exporter of coal used in power stations, are benefiting as economic growth in China boosts demand for coal to generate electricity.
Source : Bloomberg