JSW Energy’s O2 Power acquisition tells us buying is better than building assets

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Subscribe to enjoy similar stories. JSW Energy Ltd has announced the acquisition of O2 Power Pooling, a company engaged in renewable power, for an enterprise value (EV) of ₹12,468 crore. While the total consideration is ₹15,154 crore, the net working capital is ₹2,686 crore largely made up of cash, thus resulting in a lower net EV.

Additionally, ₹14,000 crore capital expenditure will be required to reach total capacity of 4.7GW, which means the total cost for the entire capacity works out to about ₹26,000 crore. Note that 4.7GW of capacity is split into three GW of solar and 1.7GW of wind—building this capacity would have come at the same cost, that is approximately ₹26,000 crore, as setting up solar power plants that cost ₹4 crore per MW, and ₹8 crore per MW for wind. Even then, the acquisition is excellent for JSW Energy.

Here’s why. Building new plants involves a gestation period. There are inordinate delays in land acquisition, regulatory clearances, arranging for power evacuation (transmission connectivity) and most importantly, finding the right customer for power at an attractive price for a long duration.

For JSW Energy, building new capacity would have meant uncertain timeline and a lack of revenue visibility. O2 Power has everything in place and it has already tied up for offtake of power. It has blended tariff rate of ₹3.37 per kwh (simplified as one unit of power consumed at home) and the remaining life at 23 years.