ONGC keen to buy HPCL; deal to cost `42,254 cr

THE NA­TIONAL E&P COM­PANY FOUND BPCL TOO EX­PEN­SIVE AS IT EVALUATED THE OP­TIONS OF AC­QUIR­ING EI­THER HPCL OR BPCL

Resource Digest - - CONTENTS -

State-owned Oil and Nat­u­ral Gas Cor­po­ra­tion (ONGC) is keen to ac­quire In­dia's third-big­gest fuel re­tailer Hin­dus­tan Petroleum Cor­po­ra­tion Ltd (HPCL) in a Rs 42,254 crore deal af­ter find­ing Bharat Petroleum Cor­po­ra­tion Ltd (BPCL) too ex­pen­sive to buy. Fol­low­ing up on Fi­nance Min­is­ter Arun­jait­ley's Bud­get an­nounce­ment of cre­at­ing an in­te­grated oil com­pany, ONGC evaluated the op­tions of ac­quir­ing ei­ther HPCL or BPCL — the two down­stream oil re­fin­ing and fuel mar­ket­ing com­pa­nies.

While ac­quir­ing ei­ther one of them made a lot of busi­ness sense, ONGC found the na­tion's sec­ond-big­gest fuel re­tailer, BPCL, too ex­pen­sive, sources privy to the de­vel­op­ment said. Bharat Petroleum Cor­po­ra­tion Ltd has a mar­ket cap of Rs 1,01,738 crore and buy­ing the govern­ment's 54.93 per cent would alone have en­tailed an outgo of Rs 55,885 crore.

So ONGC is in favour of ac­quir­ing HPCL, which has a mar­ket cap of Rs 54,797 crore and buy­ing the govern­ment's en­tire 51.11 per cent stake would en­tail an outgo of Rs 28,006 crore. An­other Rs 14,000 crore or so would be re­quired in case an open of­fer has to be made.

Sources said that while ini­tially the govern­ment was look­ing at cre­at­ing an in­te­grated oil com­pany through the merger of an oil pro­ducer with a re­finer, the idea was dropped for the fear of re­peat­ing of the Air In­dia-in­dian Air­lines merger story.

Sim­i­lar dif­fer­ences in work cul­ture and ethos pre­vail in up­stream and down­stream firms and so the ex­er­cise un­der con­sid­er­a­tion now is to only help the govern­ment mop up re­sources and HPCL would be­come a mere sub­sidiary of ONGC.

ONGC al­ready has a re­fin­ing sub­sidiary in Man­ga­lore Refinery and Petrochem­cials Ltd (MPRL). Sources said that an open of­fer to buy an­other 26 per cent stake from other share­hold­ers of HPCL would at cur­rent prices cost ONGC an­other Rs 14,247 crore.

As per the Se­cu­rity and Ex­change Board of In­dia’s (Sebi) takeover code, if a com­pany ac­quires more than 25 per cent in an­other listed com­pany, it has to make an open of­fer to buy at least 26 per cent more in the tar­get firm. Some re­ports have sug­gested that Oil and Nat­u­ral Gas Cor­po­ra­tion buy­ing the govern­ment stake in HPCL may not trig­ger an open-of­fer rule, as the govern­ment's hold­ing is be­ing trans­ferred to an­other state-run firm and the own­er­ship is not go­ing to change.

But sources pointed out that way back in Fe­bru­ary 2002, state-owned In­dian Oil Cor­po­ra­tion (IOC) had ac­quired the govern­ment's 33.58 per cent stake in fuel re­tailer IBP Co Ltd for Rs 1,153.68 crore and had to make an open of­fer for ad­di­tional shares. Both IOC and IBP were govern­ment owned com­pa­nies.

Sources said that the oil min­istry and Oil and Nat­u­ral Gas Cor­po­ra­tion may try and seek ex­emp­tion from the open of­fer to keep the ac­qui­si­tion cost low. Oil and Nat­u­ral Gas Cor­po­ra­tion has cash re­serves of Rs 13,014 crore and will have to bor­row at least Rs 18,000 crore to fund the govern­ment stake ac­qui­si­tion in HPCL, they said.

If the open of­fer is made, ad­di­tional bor­row­ings would have to be done. There are only six ma­jor com­pa­nies in the oil sec­tor — Oil and Nat­u­ral Gas Cor­po­ra­tion and Oil In­dia Ltd (OIL) are oil pro­duc­ers, In­dian Oil Cor­po­ra­tion, Hin­dus­tan Petroleum Cor­po­ra­tion Ltd and Bharat Petroleum Cor­po­ra­tion Ltd are in the refinery busi­ness and GAIL (In­dia) Ltd is in the mid­stream gas trans­porta­tion busi­ness.

The rest such as ONGC Videsh, Chen­nai Petroleum Corp (CPCL), Nu­ma­li­garh Refinery Ltd and MRPL are al­ready sub­sidiaries of one of these six PSUS. Sources said that the op­tions were very lim­ited and ONGC chose HPCL over BPCL. HPCL will add 23.8 mil­lion tonnes of an­nual oil re­fin­ing ca­pac­ity to ONGC'S port­fo­lio, mak­ing it the third-largest re­finer in the coun­try af­ter IOC and Reliance In­dus­tries.

ONGC is al­ready the ma­jor­ity owner of MRPL, which has a 15mil­lion tonne refinery. Sources said that ONGC buy­ing HPCL would re­quire two sets of Cab­i­net ap­provals — one where the govern­ment ap­proves the sale of its all or part of its 51.11 per cent stake to ONGC and the other for al­low­ing ONGC to spend the money on a stake buy.

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