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Risk Mitigation

Strategies: striking a

balance

David Watkins and Estelle Candau19 September 2019

Case Study 1: Tenaga Nasional Berhad

• TNB looking for a strategic partner

in India

• India very large and growing market

with strong intrinsic demand for

power

• Improving fundamentals in Indian

power sector

• USD 300 – 600 million available for

investment

• Looking for a 25 – 40% strategic

stake

• Conducts a large scale scoping study

Strategic rationale

Case Study 1: Tenaga Nasional BerhadGMR Energy Limited

• Operates through a large number of

subsidiaries in India and Nepal, with

projects covering coal, gas, solar

and hydro

Case Study 1: Tenaga Nasional BerhadDeal timeline

Sep

2014Apr

2015Jun

2015Sep2015

Oct2015

Dec 2017

May2016

• Scoping study of the Indian market. • Meetings with selected Indian

companies.• GMR selected as preferred partner.

• Preliminary due diligence on GEL assets, meetings with GMR to understand asset portfolio.

• GMR visit TNB plants in Malaysia.• Draft term sheet agreed.• Formulation of financial model and

assumptions.

TNB visits Minister of Power, Minister of Finance,

Coal Secretary etc.

Non-binding

term sheet signed.

• Red flag DD reports.

• DD report meetings in Delhi.

• Valuation assumptions revised.

Signing of SA and SHA.

Completion• Ongoing confirmatory diligence.• Ongoing valuation model

discussions (and adjustment of model assumptions).

• Negotiations of SA and SHA.• Risk Committee development of risk

matrix and mitigation cascade.

Nov2015

Dec2015

• More advanced due diligence on GEL assets.

• Development of financial model assumptions.

• Condition precedent satisfaction.

• Implementation of restructuring steps – analysis of “excludable assets”.

Assessment of “bring

back” assets.

Option long-stop date.

Pre-completion

Risk Mitigation Strategy - Risk Toolbox

Red

Amber

Green

Categorisation of risk

Risk Mitigation Strategy - Risk Toolbox

21

3

Conditions precedent (to

force resolution)

Pre-sale restructuring

Valuation adjustment

Walk away

Risk mitigant medals

Specific indemnities

Warranties

Post-completion

undertakings

Case Study 1: Tenaga National Berhard

Risk: Rajahmundry

Gas power station – “jewel in the crown” of GMR’s

assets?

Lenders threatening to take action under insolvency

regime

Power station unable to produce any energy due to

tax litigation

Penalties being incurred under power production agreements

(PPAs)

Case Study 1: Tenaga National Berhard

Specific indemnities

Pre-sale restructuring

Warranties

Walk away

Post-completion undertakings

Conditions precedent (to force resolution)

Valuation adjustment

What would you do?

Lower

level risk

mitigant

High level

risk

mitigant

Case Study 1: Tenaga Nasional Berhad

Pre-sale restructuring (condition

precedent to completion)

Call option to re-integrate

Rajahmundry after a two

year clean-up period

Complicated provisions / undertakings

around conduct of business and

disclosure in the clean-up

period

Strategy

Case Study 1: Tenaga Nasional Berhad

Wildlife concerns

Risk: Bajoli Holi – what would you do

Options:

Factor into valuation Negotiate conditions precedent

Post-completion

undertakings

Case Study 1: Tenaga Nasional BerhadWhat would you do?

Wildlife concerns

Post-completion undertakings (and fixed indemnity if undertakings not

complied with)

Case Study 2: Public acquisition of

ExplorationCo with energy assets in Africa

Initial timeline

ExplorationCoputs up “For

Sale” sign after commercial discovery

ExplorationCoand

CompetitorCojointly announce possible offer by

CompetitorCo

BidCo announces possible offer

First African country confirms that tax will be

charged on ExplorationCo’s

capital gain on the indirect transfer of

its First African country interests

CompetitorCoannounces a firm

offer for ExplorationCo

BidCo announces a firm offer for ExplorationCo

Case Study 2: Public acquisition of

ExplorationCo with energy assets in Africa Risk: Tax

First African country approves transaction

Day 59 – Energy Minister of Second African country makes the final granting of approval conditional on tax payment

Thought to be no legal basis for tax bill of Second African country

Case Study 2: Public acquisition of

ExplorationCo with energy assets in Africa

What would you do

Walk away Pay tax bill Prepare for injunction against the government

Use diplomatic channels

Seek to coordinate approval with co-concessionaires

Wait and see

Case Study 2: Public acquisition of

ExplorationCo with energy assets in AfricaStrategy

Prepare for injunction against the government

Use diplomatic channels

Seek to coordinate approval with co-concessionaires

Wait and see

Pay tax bill

Walk away

Key risks takeaways

All corporate transactions involve risk

The job of the deal team is to manage risk, not eliminate risk

• Step 1: Grade the risk (Red, Amber, Green) – what really matters and what is less important (value; strategic etc.)?

• Step 2: Devise risk mitigation strategy using the toolbox of specially created, fit for purpose risk mitigants (Gold, Silver, Bronze)

Strategy to deal with risk: