Essar Group, Rosneft explore part-crude, part-cash deal

Mumbai: The Essar Group and Russia’s OAO Rosneft are discussing the financial terms of their multi-billion deal-in-the-making.
On 8 July, Rosneft, Essar Oil and Gas Ltd and Essar Energy Holdings Ltd signed a non-binding term sheet with regard to the deal that will give Essar Oil Ltd access to Rosneft’s crude output, and the Russian firm, in return, a toehold in the Indian refining and retail market.
As per the term sheet, the Essar Group agreed to sell as much as 49% of Essar Oil for over Rs.10,000 crore.
According to two persons familiar with the development, both Rosneft and Essar Oil are evaluating a part-crude and part-cash deal.
On 11 December, Essar Oil signed a deal with Rosneft to import 10 million tonnes of crude oil a year for 10 years.
“The financial terms of the deal are being discussed while both companies are exploring a part-crude and part-cash deal,” said one of the two persons.
While the deal is between Essar’s promoting Ruia family and the Russian firm, lenders to the Indian company may have cause for cheer.
The promoters will use the deal proceeds to reduce the debt on the balance sheet of the company, the person cited above added. “This deal will be used to reduce debt taken from Russian bank VTB and other lenders. But all these calculations are based on the valuation, which is yet to be finalized.”
The total debt of Essar Oil stood at Rs.25,311 crore as on 31 March.
A third person close to the development confirmed that the Ruias would use part of the proceeds to reduce debt, in particular, dues to VTB and Standard Chartered Bank.
A spokesperson for Essar Group declined comment but pointed towards disclosures made in the statement on 9 July.
The proposed transaction is conditional upon various factors such as due diligence, determination of the transaction price, execution of definitive transaction documents and receipt of requisite approvals, the Essar statement said.
After years of losses, Essar Oil’s 20 mt per annum crude oil refinery at Vadinar, Gujarat, is now running on all engines.
Analysts said Rosneft could be looking at a retail play, too, and strengthen Essar Oil’s retail network. The company’s coal bed methane (CBM) gas business is also gaining momentum.
If the deal goes through, however, the public will soon be pushed out of the company through a proposed delisting of the shares sooner than later.
On 17 July, Essar Oil got a nod from the Bombay Stock Exchange (BSE) to go ahead with the delisting of shares.
The nod from the National Stock Exchange, or NSE, came on 7 July.
This paves the way for the start of a reverse book-building process to determine the price at which the company will be delisted.
A reverse book-building process is a mechanism of delisting under which shareholders tender their shares at their prices of preference.
Thereafter, the highest tender price is fixed for the delisting.
However, the delisting, even if done at Monday’s closing price of Rs.193.80 per share, would mean a return of 16% in the last 10 years, compounded annually.
This essentially means that the company’s share price has risen by only 4.44 times in the last 10 years. It has, however, risen 97% in the past 45 days, a possible effect of the ongoing talks with Rosneft.
An executive at a proxy advisory firm said the move isn’t fair to shareholders.
“While the company has been looking up, I am more concerned about the shareholders. The promoters have never created value for the shareholders in the last several years,” said Shriram Subramanian, managing director of InGovern Research Services Pvt. Ltd.
During the last 10 years, Essar Oil’s revenues have jumped up by almost 130 times from Rs.636 crore to Rs.83,000 crore. Its net income during the period has moved from Rs.29 crore in 2009-10 to Rs.1,521 crore in 204-15.
On a peer-to-peer comparison, Mukesh Ambani’s Reliance Industries Ltd (RIL), which runs a 60 mtpa refinery at Jamnagar, Gujarat, has given an annually compounded return of 21% in the last 10 years in terms of share price, according to Bloomberg data.
During the same time, the company has disbursed dividends to the tune of Rs.21,700 crore; Essar Oil has paid no dividends.
In a written reply to Mint in July last year, the company justified its decision to delist, saying, “Essar Energy Holdings Ltd (the parent of Essar Oil) believes that the company requires sustained, substantial investments to develop and grow its business (especially refining and marketing) and a full ownership will provide it with increased operational and financial flexibility to support our business and strategic needs.”
Incidentally, in January 2007, Essar Energy Holdings had issued a similar statement seeking shareholder approval to delist the company citing the need for “flexibility in the operations and management of the company, greater efficiency and at the same time provide an exit opportunity for the shareholders” of the company.
The delisting had failed back then.
Source: Mint; 21 July 2015
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