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Essar, Marathon may switch off deal

Abhijit S.Basu

MUMBAI, June 23

THE Essar Group and the US-based Marathon Power Company are likely to call off the deal for the acquisition of Essar Power Ltd.

Sources familiar with the negotiations confirmed the move but an Essar spokesperson, when contacted, said ``we are unable to comment on the matter since we are bound by the confidentiality clause with Marathon in the agreement.'' Both the parties had set a deadline of June 27, 2000 for the consummation of the deal.

Sources said the reluctance of the Gujarat Electricity Board (GEB) in allowing third-party sale of power and the refusal of the financial institutions (FIs) to accommodate Marathon's request for takeover funding and interest rate reduction (of Essar Powe r's dues), were the prime reasons for the deal not going through.

GEB is understood to have expressed reservations about allowing Marathon Power to sell power directly to Essar Steel Ltd at a cheaper rate. The Essar-Marathon deal was subject to the condition that Essar Steel would continue to receive constant and unint errupted power supply under a 20-year power purchase agreement at an economic cost.

In India, third-party sale of power is not allowed and private power producers have to sell power only to the State electricity boards (SEBs). Essar Power was, however, allowed to sell power directly to Essar Steel by virtue of being a group company and, thus, being construed as a captive power project.

Sources said the institutions were also not keen on funding Marathon's takeover of Essar Power and wanted the company to bring in funds from abroad. FIs had also turned down the request for reducing the interest rate on Essar Power's dues by about four t o five per cent and had asked it to submit a revised proposal.

Marathon Power had signed a Memorandum of Understanding (MoU) with the Essar Group on June 25, 1999, for acquiring its fully owned subsidiary - Essar Power - at an aggregate price of $170 millions (about Rs. 720 crores). The transaction was expected to b e completed by August 31, 1999 but had to be postponed to June 27, 2000 due to the failure of both the parties in getting the necessary approvals.

In a press release issued at the time of announcing the deal, the Essar Group had said the sale would help it in debt reduction and exposure reduction of Rs. 1,550 crores to FIs and banks. The 515-MW Essar Power plant is located at Hazira in Gujarat and had been commissioned in October 1997. It has a 20-year Power Purchase Agreement with GEB and Essar Steel Ltd.