Case 093M&A strategyCore
Two companies form a transmission joint venture. One contributes land and permits valued at Rs 300 crore, the other Rs 450 crore of cash. The project's NPV is Rs 1,000 crore and the proposed split is 51/49 in the land partner's favour. Is it fair, and what would you change?
1The situation
Agnay Energy, an invented power developer, holds the land, right of way and regulatory permits for a 400 kV transmission line. It wants a partner to fund construction. Soleno Grid, an invented infrastructure investor, will put in Rs 450 crore of cash. Agnay's land and permits have been independently valued at Rs 300 crore.
The project's net present value, after all construction cost and at the agreed discount rate, is Rs 1,000 crore. Agnay proposes a joint venture owned 51% by Agnay and 49% by Soleno, with Agnay as operator. Soleno's investment committee asks you whether to accept.
2Your task
Test the split against what each side contributes, show who gains and who loses under the proposal, and say what you would change so the deal is fair to both.
Quick check
If ownership followed contributed value, what share would Agnay hold?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
No: contributions split 40/60, so a 51/49 split moves about Rs 110 crore of NPV from Soleno to Agnay. Under the proposal Agnay turns Rs 300 crore into Rs 510 crore, 1.70x, while Soleno turns Rs 450 crore into Rs 490 crore, 1.09x. Either Agnay adds about Rs 168 crore of cash to earn 51%, or it takes 51% of the votes with 40% of the economics, or it names what the extra eleven points pays for.
Step 1What does a fair split look like before anyone argues about control?
Start from contribution, because it is the only number both sides agreed. Agnay's Rs 300 crore of land and permits and Soleno's Rs 450 crore of cash total Rs 750 crore, so contribution says 40/60. Two friends open a cafe: one brings the shop premises worth Rs 30 lakh, the other brings Rs 45 lakh to fit it out and stock it. Nobody would call 51/49 to the first friend an equal deal. On a 40/60 split of the Rs 1,000 crore NPV, Agnay gets Rs 400 crore and Soleno Rs 600 crore; each turns a rupee of contribution into 1.33 rupees of value. That symmetry is what fair means here: the same return on what each put in.
Step 2Who gains from the proposed 51/49?
Agnay: its share of NPV rises from Rs 400 crore to Rs 510 crore, and Soleno's falls from Rs 600 crore to Rs 490 crore. Measured against what each put in, Agnay earns 1.70x and Soleno 1.09x. Soleno still makes money, which is how proposals like this get past a tired committee, but it makes Rs 40 crore on Rs 450 crore of risk capital while Agnay makes Rs 210 crore on Rs 300 crore of land it already owned. The eleven points are worth Rs 110 crore, an 11% promote that nobody has named.
| Rs crore | Agnay | Soleno |
|---|---|---|
| Contribution | 300 | 450 |
| Share of contribution | 40% | 60% |
| NPV at contribution split | 400 | 600 |
| NPV at proposed 51 / 49 | 510 | 490 |
| Gain over contribution, proposed | 210 | 40 |
| Value per rupee in, proposed | 1.70x | 1.09x |
Step 3What would make 51/49 defensible, and what would you change?
Ownership can depart from contribution, but only for something named and priced. Three honest ways to get Agnay to 51%: it adds about Rs 168 crore of cash, its land is revalued to about Rs 468 crore with Soleno's agreement, or the partners agree that development work and operatorship are worth a promote of Rs 110 crore and write that down. A fourth route separates votes from money: Agnay holds 51% of the voting rights, which gives it operating control and consolidation, while cash flows split 40/60 through a shareholder agreement or a second class of shares. Infrastructure funds often accept that, because what they are buying is the cash flow, not the board seat.
Check the Rs 300 crore itself before you negotiate the split. A right of wayThe legal permission to run a line across land owned by others, which can take years of approvals and compensation to assemble. is worth Rs 300 crore only if the line gets built; Soleno's cash is worth Rs 450 crore whatever happens. If the project stalls, Agnay has lost paper value and Soleno has lost money, so the risk each side carries is not equal even at 40/60. A fair structure also protects Soleno's cash: it should fund construction in tranches against milestones, and Agnay's permits should transfer to the venture on day one, not on completion.
Close with the committee's answer and the limit. Decline 51/49 as drafted; offer 51% of votes with 40/60 economics, or 51/49 economics if Agnay funds the gap in cash. The limit of the arithmetic is the NPV itself: Rs 1,000 crore is a forecast with a discount rate inside it, and a partner who controls the operating budget controls the forecast. That is why the vote split and the economics split are negotiated together, and why Soleno should ask for reserved matters on capex and tariffs whatever its share.
Where candidates lose it
The usual miss is to accept that the originator deserves control and jump to negotiating 51/49 down to 50/50. The fair baseline is 40/60, so 50/50 is still a Rs 100 crore gift. Start from contribution and make the other side name what the extra points pay for.
The second is treating votes and economics as one number. A partner who needs control for consolidation can have the votes while the money follows contribution; collapsing the two leaves value on the table that a shareholder agreement could have kept.
What the interviewer asks next
- Soleno's cash is drawn over two years of construction while Agnay's land goes in on day one. Should the timing change the split?
- What if the Rs 300 crore valuation came from Agnay's own adviser?
- How would you structure a promote that pays Agnay only if the project beats its budget and timeline?
- Agnay wants to consolidate the venture. What does that need, and what can Soleno ask for in return?
Company names and figures are illustrative.