Event update: GMR Infrastructure (Outperformer) - Unlocking value in airport business; New Deal superior than earlier Deal

Event

GMR Infrastructure (Infra) has entered into an agreement to sell its 49% stake in GMR Airports (GAL) to France’s Groupe ADP at an enterprise value of Rs220bn. The new deal would replace GMR’s earlier deal with Tata-GIC

Details

• GMR has signed a share-purchase agreement with Groupe ADP to sell 49% stake in GAL. GMR Infra holds 92% stake in GAL, with 5.86% of the shares held by PE investors Groupe ADP operates two main airports in France - Paris-Charles de Gaulle and Paris-Orly.
• The deal’s post-money valuation is estimated at Rs265bn, which comprises base case valuation of Rs220bn and earnout of ~Rs45bn. The earnout is subject to certain conditions of performance metrics achieved over next 5 years. Note that earnout would increase GMR Infra‘s stake in airports, without impacting its cashflows (if valuation increases to Rs265bn, GMR’s stake too would jump to 59%).
• This new deal will replace GMR’s earlier deal with Tata- GIC and SSG (GMR’s valuation under new deal is 22% higher).
• The total money to be raised is estimated at Rs108bn, which constitutes Rs98bn through secondary sale of shares by GMR Infra’s, and Rs10bn through new share issuance. The deal will likely be in two phases, 1) First tranche of Rs52.4bn (24.99% stake) is expected to be received before end Feb 2020, and, 2) management expects to close second tranche of Rs55.4bn by Jun 2020, post regulatory approvals.
• GMR expects to use the money from stake sale to retire its corporate debt of Rs80bn (net). As a result, we expect GMR’s net debt (Rs21bn ex-FCCBs) to reduce from Rs255bn to ~Rs155bn.
• Post investment by strategic investor, GMR would restructure the business into two verticals a) airport, and, b) Power and urban infrastructure, which we believe should create shareholder value.

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GMR’s new agreement to sell 49% stake in airport business at 22% higher valuation than earlier deal (within a span of 12 months) highlights the attractiveness of its airport business. GMR expects to use a large part of the proceeds to repay corporate debt. The company has also entered into an agreement to sell Kamalanga power plant to JSW Energy, which would further reduce its corporate debt. Once both transactions completed, we believe GMR would demerge into 2 separate businesses, 1) airport, and, 2) power & urban infrastructure. The demerger would further unlock value in the airports business. We reiterate Outperformer rating on the stock, with a revised TP of Rs30 (valuation aligned with the new deal).