MUMBAI, AUG 31: After hectic negotiations, the Ruias have gone a step closer towards sealing the $170 million (Rs 720 crore) deal with Marathon Power by signing the share acquisition agreement for 100 per cent equity of Essar Power on Tuesday.The deal was signed on the last day till which the memorandum understanding (MoU) signed in June was valid. The closure of the deal is, however, subject to approvals from the Gujarat government and financial institutions which Essar said the final transaction will be reviewed is likely to be resolved within the next 100 days. In a statement, Essar said that Marathon has accepted the power plant after a thorough financial, technical and legal due diligence.The deal has managed to come out of the grim possibility of being abandoned after the Gujarat government and financial institutions posed twin threats to it - the state government by declining to offer power to Essar Steel at a concessional rate, and the institutions by disallowing a reduction in interest charges.Essar had entered into an MoU with the $22-billion Marathon group to sell Essar Power to Marathon Power Alpha, a special purpose company floated in Maurutius. Prime Hazira, a closely-held company of the Ruias, holds a 49 per cent stake in Essar Power which has an equity base of Rs 523 crore, while Essar Steel and Essar Oil hold 42 per cent and nine per cent respectively.Going by the terms of the MoU, Marathon is to take up Essar Power's total liabilities of Rs 1,550 crore and Essar Steel will continue to draw 215 mw power from Essar Power under a 20-year power purchase agreement at a lower-than-grid rate. The deal will also lead to a funds inflow of around Rs 380 crore into Essar Steel, by virtue of its holding in Essar Power. The group flagship is staring $250 million floating rate note redemption obligation by October 20.The Gujarat government, on the other hand, put a spoke in the wheel by deciding against giving the go-ahead to the deal as it felt that Essar Steel should not be allowed to draw power at the subsidised rate as it was selling its entire stake. Instead, the state government had stressed that Essar Steel should buy power from the state grid and the entire 515 mw be sold to the SEB and insisted that Essar Steel should retain at least 25 per cent stake to be able to get power at the concessional rate.Essar Power had initially offered to sell its entire power production to the SEB but the Gujarat government opted for drawing only 300 mw power from the company, allowing Essar Power to supply 215 mw directly to Essar Steel. Essar Power is believed to have approached the state government with a proposal for continuing with the existing PPA despite the change in ownership at Essar Power as otherwise its commercial viability would be affected. A decision on this issue is expected only after a new government takes over after the elections.Banks and financial institutions, on the other hand, have refused to bring down the interest cost on the Rs 1,550 debt portfolio of Essar Power. Marathon recently made presentations to IDBI seeking a reduction in interest cost on the company's long-term loans and changing the debt profile. It had sought a 4 per cent reduction in interest rates from 19 per cent to around 15 per cent. It also wanted to increase the average life of the loans from seven-nine years to 12-14 years, which the FIs have so long declined.Essar is also believed to have rejected the Marathon condition on staying away from the power sector in future. The group is still believed to be keen on getting into the power business in Madhya Pradesh as well as in Vadinar, Gujarat, at some later stage.
