Highway sector on consolidation mode, to see more M&A activity

The country’s highway sector is in for a major consolidation, with mergers and acquisitions set to accelerate.

Most infrastructure companies that have completed BOT projects and are facing debt concernsare on the verge of divestment. This is to redeploy the freed up equity into new projects and pay up the debt to bankers.

There are specialised players such as Brookfield and Cube Highways, sovereign funds, and of late, Mitsubishi as a consortium, that are keen to buy assets with the potential to provide good returns.

Interaction with some of the sector players shows that if 2017 was a busy year in the M&A pace, it is likely to get accelerated from this year onwards.

Siva Subramanian, Senior Director of India Ratings, says: “The market is poised for accelerated consolidation. While a number of debt-laden infrastructure companies are keen to divest their projects, there are specialised players such as Brookfield, Cube Highways and some like Canadian Pension Fund on the prowl.

“Typically, any return of 9-10 per cent and above is attractive for investors. Significantly the size of deals, too, is getting bigger and, in some cases, deals are being made for several projects at one go.”

Ajay Garg, Managing Director of Equirus Capital, says: “There has been strong growth in traffic on highways after issues relating to GST have been sorted out. This is making them attractive for buyers as most assets are nearing targets. The EPC works have turned attractive. And most infra firms want to take to EPC selling assets. This will accelerate the activity.”

Brookfield had acquired Simhapuri and Rayalaseema Expressways in AP for about ₹1,800 crore in September last.

Towards the end of last year, the debt-trapped Hyderabad-based IVRCL announced a deal to divest stake in Kumarapalayam and Salem Tollways in Tamil Nadu to Cube Highways and Infrastructure Pte Ltd of Singapore, which has about 1,700 km under operations in India. The company is also looking to divest stake in more road projects to pare its debt.

Significantly, within days of the deal by Cube Highways and IVRCL, a Japanese consortium led by Mitsubishi picked up a 20 per cent stake in Cube Highways. Mitsubishi, along with East Nippon Expressways Company Ltd (Nexco East) and Japan Overseas Infrastructure Investment Corporation for Transport and Urban Development, agreed to acquire a 20 per cent stake in Cube Highways. The consortium is committed to expand in the highways segment.

T Adibabu, COO of Lanco Infratech, which is facing insolvency proceedings, says the company is seeking to divest its interest in two highways, both located in Karnataka, subject to approvals by the lenders.

Going by the current pattern of investments, a number of tollways with good returns are being acquired. This is likely to spill over to State highways.

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