Brookfield to acquire Mukesh Ambani’s loss-making pipeline for Rs 13,000 crore

This would be the first time a private pipeline is India was being monetised.

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As part of the agreement, RIL has the right to acquire equity shares of PIPL held by the InvIT at an equity value of Rs. 50 crore.
Brookfield on Thursday announced it is buying the loss-making East West Pipeline Ltd (EWPL), earlier known as Reliance Gas Transportation Infrastructure Ltd, for an enterprise valuation of Rs 13,000 crore ($2 billion) from Mukesh Ambani, chairman of Reliance Industries.

This will be the first time a private pipeline is India is being monetised. It's also the first time Reliance, India's largest private sector company. Brookfield is also buying Reliance Jio’s telecom tower assets in a similarly structured transaction that could value the portfolio at $7-8 billion, said sources aware of the developments.

Brookfield has already filed the preliminary placement memorandum for setting up a infrastructure investment trust ( InvIT). Brookfield will be the sponsor or this India Infrastructure Trust and will own 90% of it. The InvIT will acquire 100% equity interest in Pipeline Infrastructure Private Limited (“PIPL”) which currently owns and operates the Pipeline.


Ambani

Brookfield is also tying up with a clutch of marquee asset management companies, family offices, banks and insurers to come on board with a 10% stake. ET on February 11th reported that ICICI Prudential Asset Management Company, the family office of the Poonawallas of Serum Institute, Russell Mehta of Rosy Blue, also the father in law of Akash Ambani, Bank of Baroda are likely to join the Canadian investor in India Infrastructure Trust, the vehicle that is being created for the acquisition to take over the 1,400 km common carrier pipeline from Kakinada on the east coast to Bharuch in Gujarat. The law stipulates at least 5 non promoter sponsors for such InvITs. These investors need to come on board within a fortnight.

The identity of these investors are not yet disclosed.

EWPL has built and operates the critical pipeline to transport natural gas produced by Reliance-BP from the Krishna-Godavari (KG) basin on the east coast and links to users on the west coast.

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The Competition Commission of India had approved the transaction in September 2018.

The Rs 13,000 crore will be evenly split between equity and debt. Axis and ICICI Bank are providing the financing. The other investors together are likely to put in Rs 1,000-1,200 crore as equity contribution and will own 10-15% of the asset.

As part of the agreement, RIL has the right to acquire equity shares of PIPL held by the InvIT at an equity value of Rs. 50 crore. It's current investment in preference shares valued at Rs. 4,000 crore to continue and will be converted into equity at the end of 20 years.

The refining and oil and gas major will continue to be entitled to transport gas, either by itself or of any customers, free of cost against any outstanding unutilized capacity payments.

At the current approved final tariff of Rs. 71.66/MMBTU, if the average volume of gas transported is 22 MMSCMD, RIL will not be liable to make unutilized capacity payments.

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The next review of tariff in April 2020 will also consider upward revision arising from

determination of lower revised capacity of the pipeline. Considering the new investments in the upstream sector in the KG basin, and the growing LNG imports, ability to swap gas, the average volume expected to be transported through the pipeline is expected to be significantly higher compared to the current levels, Reliance said in a statement.

RIL will be entitled to a significant participation in the net earnings of PIPL under the mechanism specified in the pipeline usage agreement. JM and Ambit are the advisors in the transaction

KEY INFRASTRUCTURE
Other than KG Basin output, the pipeline also transports gas from other sources including RLNG (regasified LNG) terminals along the stretch of the pipeline and is connected to pipelines of other operators such as state-run GAIL (India) Ltd and Gujarat State Petronet Ltd for onward delivery nationwide.

But its cash flow is sensitive to the volume of gas available for transportation and the drop in RIL’s gas production from its KG-D6 block over the past few years, has made it bleed. In FY18, the operational revenue of the pipeline was Rs 884 crore and a net loss of Rs 715 crore. The total debt is Rs 13,715 crore.

The pipeline, Sikka Ports & Terminals Ltd (SPTL) and Reliance Utilities and Power Pvt Ltd (RUPPL) are key companies in Ambani’s privately held RIHPL Group and their operations are critical for Reliance Industries as they are closely integrated with its facilities in Jamnagar, Dahej and Hazira in Gujarat, and with its KG-D6 gas fields. The facilities cater exclusively to RIL’s existing facilities as well as its expansion in the petrochemicals and refining business.

In five years since April 2012, RIHPL group has extended support to EWPL in the form of subordinated debt and preference shares of about Rs 4,826 crore and Rs 8,000 crore, respectively, as of March 31.
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