The reason it is called a "power plant project", rather than a "power plant", is that it is a project in development rather than an actual asset. My client has the rights to the land where the power plant might be located one day, and they have a licence from the relevant government authority to build a power plant on that land. What they don't have is financing to pay for the project, a contractor to build it or a strategy to sell the power should the plant ever actually be built.

 

That's why this asset will be difficult to sell, because it's not really an asset at all, just the beginnings of a business. However, there is one important fact about this power plant project that might just make it sellable; it is located right next to somebody else's actual operating power plant.

Now, I don't know that much about the power market, but I do know that if my client's power plant actually gets built it will be in immediate competition with this other plant, reducing its profit. As a courtesy, therefore, I have arranged to see the owners of the other asset.

"Given the close proximity of your plant to my client's future asset, I thought it polite to let you know the status of the sale process for my client's project," I explain.

"Sale process?" their chief executive, Anthony, seems quite interested.

"Yes, my client doesn't have the capital right now to commit to the construction of this plant so we have decided to look for buyers with more aggressive development plans."

About a week later, Anthony asks me to come back and see him again.

"Look, Alan, we are very familiar with your client's project and we'd like to make a bid for the asset ourselves. We believe that we can offer you a price without the need to go through any study of the project, so we can perhaps save you the effort of having to go through an auction process," says Anthony.

"Well, it would have to be a very attractive offer for us to forgo the competitive auction process," I say. "When will you be in a position to make an offer?"

"Right now." This is interesting. My own assessment of the value of the project is something like US$5 million. So I'm very curious about what he has come up with.

He doesn't tell me the offer right away. First he goes on and on about how difficult the power market is and how much the price of fuel has gone up and how these things are going to really have an impact on the value of my client's project. None of this is news to me, and I get that he is trying to talk down the value to soften the blow when he actually tells me his price, but I just want him to get on with it.

"Forty million dollars."

I have to ask him to repeat himself as I want to make certain that he didn't say "four million dollars", but once I hear it again I have to get out of the meeting as soon as possible, before I lose control of my face and break out in a huge grin. I shake hands, ride down in the lift and breathe a huge sigh of relief. Wow. My client will be so impressed.

"You remember how I said that I think the asset was worth about five and we should be happy if we can get ten?" I say.

"Yep. Sure," says my client.

"Well they offered US$40 million," I announce triumphantly, and pause to allow him to congratulate me and tell me that I'm a genius.

"OK. Let's see if we can get 10 per cent more and we've got a deal," is what he says. It's hard for me to resist yelling at him that he is insane not to accept this price immediately. The amount these guys are prepared to pay in order to ensure that this plant never gets built is far more than the project is worth.

But I don't. I reluctantly call the buyer and ask for US$50 million. We talk about it for a few days with me sweating the whole time over losing the deal and then we compromise on US$44 million, exactly what my client wanted. The contracts are signed, money changes hands, and the power station never gets built and so never eats into the profits of the owner of the other plant.

A few days later I am having a beer with my client, talking about the deal and how lucky we were.

I ask him: "What if I had called you up and said that they were offering US$5 million, what would you have said then?"

"Easy," he says with smile. "Let's see if we can get 10 per cent more and we've got a deal."