Reddy moving into Oz coal

Hancock Prospecting chairwoman Gina Rinehart will sit on GVK's board. Photo / Bloomberg

Indian billionaire selling share of energy unit to fund stake in Hancock Prospecting

G.V. Krishna Reddy GVK Group, controlled by Indian billionaire G.V. Krishna Reddy, plans to raise US$1 billion ($1.25 billion) by selling a stake in its energy unit to help fund the acquisition of coal assets from a company owned by Australia's richest woman.

The group, which runs airports and builds power plants and highways, plans to sell the stake in GVK Coal Developers in three to six months, said G.V. Sanjay Reddy, vice-chairman of GVK Power & Infrastructure, the group's publicly traded unit.

GVK agreed to pay US$1.26 billion to buy a 79 per cent stake in Gina Rinehart's Hancock Prospecting coal asset.

Utilities in Asia's second-fastest-growing major economy are seeking fuel in Australia and Indonesia to overcome a local shortfall as they build power plants. The GVK Group might spend a total of US$2.1 billion, including development costs, for the purchase, chief financial officer Isaac George said. The company would borrow US$1 billion, he added.

"This deal will help us secure fuel for our thermal power projects," George said.

"We are also planning to enter the business of commodity trading of coal."

GVK Coal is buying the 79 per cent stake in the Alpha and Alpha West projects, all of the Kevin's Corner project, as well as the rail and port projects connecting the coal deposits to Abbot Pt in Queensland.

Privately held Hancock Prospecting is chaired by Rinehart, the first woman to top Forbes Asia's list of Australia's richest people.

GVK agreed to pay US$500 million once the transaction is completed, followed by US$200 million one year from the deal closing. It will pay an additional US$560 million after the financial closure of the project, expected to be in 2012.

Funding for the acquisition was "tied up with banks", GVK said in its statement, without disclosing the names of the lenders.

Hyderabad-based GVK would keep GVK Power & Infrastructure, which had 52.5 billion rupees ($1.34 billion) of long-term debt at the end of March 31, or almost double the company's market value, out of the fund-raising process, Reddy said.

GVK Power & Infrastructure has dropped 58 per cent this year after reports of the deal began in January. GVK Power & Infrastructure will own 10 per cent of GVK Coal with an option to raise the stake to 49 per cent, according to the statement.

GVK Power & Infrastructure will invite Rinehart onto its board as a director, according to the statement.

At full output, the projects could produce 84 million tonnes of coal annually, GVK said in the September 16 statement.

Production was scheduled to start in 2014 at a rate of 30 million tons of power station coal a year, the company said. It estimated the cost of developing the first phase of output at US$10 billion.

"We have a feeling that the project development cost can be significantly brought down to US$7 billion," Reddy said.

"This can happen through cost optimisation and outsourcing a range of activities, such as coal washing and laying rail tracks."

Ernst & Young was the sole financial adviser to GVK, according to the statement, which said the transaction was expected to close in two weeks. Bloomberg