Softbank scraps renewable deal with CPPIB, to continue running SB Energy with Bharti


Masayoshi Son led Softbank Group has abandoned its plans to divest its renewable business in India — SB Energy Holdings – after carrying out a full blown global sale process for over a year. The Japanese technology and telecoms conglomerate have terminated its agreement to sell its 80% stake in the joint venture to Canada Pension Plan Investment Board (CPPIB), earlier this week, after disagreements over valuation, terms and conditions of the shareholder agreement (SHA) and governance rights could not be resolved between all parties concerned, said multiple people aware of the developments.

The plan, for now at least, is to continue running the business together with its original JV partner Bharti Enterprises.

The operating team members of SB Energy were informed of these developments earlier on Thursday morning.

“After consulting with Sunil Mittal, Son finally informed the Softbank team this week to move on from any distractions and run the business at least temporarily. Accordingly, the negotiations that were just dragging finally got called off over Tuesday and Wednesday,” said an official involved on condition of anonymity as the developments are still in private domain.

Mails to Softbank and Bharti did not generate an immediate response.

Thanks for the enquiry. Our formal on the record comment is as follows:

“We continue to look for opportunities for new investments in India, including in the renewables sector, as part of our Sustainable Energy Group strategy,” a CPPIB global spokesperson told ET but did not elaborate on the SB Energy deal. “CPP Investments is a major investor in India with C$12 billion invested to date and the country is core to our global, long-term investment strategy.”

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Set up in 2015, SB Energy is an 80: 20 alliance between Softbank Group and Bharti Enterprises that had a target of setting up 20 GW of clean energy projects with an investment of $20 billion over 10 years.

TERMS OF ENGAGEMENT

Even though, Softbank and CPPIB sources maintain that the decision was taken mutually, sources in the know say a number of factors accelerated the move, causing major embarrassment to Son himself, right after he announced annual record profits this week.

Last December, CPPIB had signed a Share Purchase Agreement (SPA) with Softbank to buy their controlling stake for $425 million. An additional $100 million were to be paid subject to future outcomes, said people aware of the development. This price was much below the $800 million book value or equity invested in the high-profile joint venture and a far cry from the $1.2 billion price tag originally sought. But Softbank had decided to pursue with the “distress sale” since it was not keen to fund the business any further.

Bharti, sources said, was not happy with the depressed valuation but had chosen to continue with a new partner and operate the portfolio of solar, wind and hybrid renewable power plants, but insisted on adding far more stringent rights than before. One such clause was a put option in its new joint venture agreement with the Canadian fund.

ET was the first to report in its October 24 edition that SoftBank and CPPIB had entered into exclusive negotiations. Since January 9, 2020, ET has consistently reported about SoftBank’s exit plans.

CHANGING GROUND CONDITIONS

The negotiations with CPPIB were expected to conclude in March 2021 subject to conditions precedent (CPs) sought by the Canadian fund related to SB Energy’s project timelines, cost-returns projections and debt. The staggered payout was also due to the long project pipeline that remained under a cloud and financing issues that needed to be settled, as per people directly involved.

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But with severe headwinds impacting the domestic renewable sector, several of these CPs were becoming impossible to keep and had to be waived, which CCPIB was uncomfortable with, according to persons mentioned above.

Domestic solar power developers have been hit with several issues in recent months ranging from rising commodity prices to imposition of 25-40% basic customs duty on key solar components imports from next year. It has also led to the backing out of key Chinese vendors from signed supply contracts to Indian power producers. Even the recent Supreme Court ruling for underground cabling of power transmission lines in the habitats of the critically endangered Great Indian bustard bird has hit the financial viability of solar projects especially in the key states of Rajasthan and Gujarat. For example, the entire undergrounding exercise alone is likely to cost the solar industry and additional $3 billion, ET reported on May 11.

The supply contract renegotiations are expected to cause further disruptions to project timelines. As much as 80% of component supplies come from China. With record-low bids, any cost push would make several projects unviable, argue industry executives. Solar modules account for about 60% of a renewable energy company’s capital expenditure. “Several SB Energy projects in Rajasthan and Gujarat were getting impacted in this regulatory and legal flux, which in turn further cut into the deal value as several of the CPPIB conditions were becoming tough to meet,” said an official involved.

Moreover, even Bharti wanted additional rights in the new agreement which further complicated the talks. Bharti’s insistence of a guaranteed return and exit rights, despite being a minority shareholder was not accepted by CPPIB senior leadership, sources mentioned above add.

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“The original SHA between Softbank and Bharti was drafted more as a joint venture even though Sunil Mittal was only a minority partner,” according to a legal source close to CPPIB who did not wish to be identified. “But in the new agreement that they were planning to sign, Bharti insisted on several governance and shareholder rights and CPPIB was not obligated to accept them. They had even given the option to Bharti to exit which they turned down yet. As international investors, they look at these as commercial calls. So even though they had signed a SPA with SB Group, a final SHA could not be signed even after months of intense dialogue.”

SB Energy claims it has a 7.7 GW pipeline of projects in India and the US and will reach its 20 GW targets within the next five years. It has almost 2 GW of operating renewable energy capacity in India, 2 GW under construction, and an additional 3,700 MW under “active development” with contracts in hand, according to the management. Analysts, however, question the viability of the pipeline projects due to recent tariff drops.

However, industry peers feel, the company being in a limbo for so long needs urgent $250 million to $300 million funding to compete projects, stop attrition and operationalise the team on ground once again.



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