Do The Russian Acquirers See Less Value In Essar Oil Than Exiting Indian Shareholders?
There is no keeping business and politics apart. As India's Prime Minister Narendra Modi met with Russian President Vladimir Putin in Goa on occasion of the BRICS summit, companies from both countries did their best to support the political talk with action. One such action was the announcement of a deal that has been cooking for over a year. A deal that not only represents the largest foreign direct investment in India, it also promises to bring some measure of relief to Indian banks weighed down by non performing loans. But the deal valuation may raise some eyebrows.
The Numbers We Have
On Saturday the Essar Group announced that Russian energy giant Rosneft, along with commodity trader Trafigura and private investment fund United Capital Partners, will be acquiring all but two percent of the group's privately held company Essar Oil for Rs 72,800 crore. The consortium will also acquire an Essar owned captive port for Rs 14,000 crore and take over a pending Essar Oil crude supplies payment to Iran currently estimated at Rs 19,000 crore.
The deal is being done in 2 tranches
Tranche 1: Essar Group will sell 49 percent of Essar Oil to Petrol Complex Pte. Ltd, an arm of Rosneft Oil Company.
Tranche 2: Essar Group will sell 49 percent to Kesani Enterprises Company Ltd. Kesani Enterprises is an investment company, owned 49 percent by Trafigura, United Capital Partners owns 49 percent as well and the Essar Group owns 2 percent.
The remaining 2 percent stake in Essar Oil is held by minority shareholders who did not tender in the delisting offer in February this year.
The Numbers We Don't Have
Rosneft and the investment consortium have put the enterprise value of Essar Oil's 20 million tonne refinery, 2,700 branded retail outlets and 1010 MW captive power plant at Rs 72,800 crore.
But the equity value of the deal, or either tranches, has not been disclosed yet.
Rosneft said in a media statement that the deal value is subject to the actual net debt and net working capital as of the date of deal closing.
A Trafigura spokesperson without disclosing the equity value, confirmed to BloombergQuint that Essar will be part of the investment consortium to help in the transition process.
Essar Oil's management also did not share any equity valution number.
The equity value will be firmed up only at the time of the closing of the deal. In the next two to three months there will be some change to debt and net working capital, by and large it will be in the range of delisting we have done or little bit higher than that.Suresh Jain, Chief Financial Officer, Essar Oil
The deal is expected to close by the end of this financial year, Jain added, in a phone interview with BloombergQuint.
The BloombergQuint Calculation
On its website Essar Oil's September 2015 financial report puts the company's total debt at Rs 30,700 crore. CARE Ratings, that rates the company's debt, says on its website that at the end of January 2016 Essar Oil had a total debt of Rs 35,850 crore.
It is not known whether that number has increased or decreased since then. Essar Oil did not provide any information when asked.
Assuming the same debt level as in January 2016, the deal with the Rosneft led consortium implies an equity valuation of approximately Rs 36,950 crore.
With a total 146.61 crore outstanding shares, that works out to an acquisition price of Rs 252 per share of Essar Oil.
That's nearly Rs 11 short of the reverse book built price of Rs 262. 80 per share that Essar Oil delisted at in February 2016.
That implies that the Russians, to buyout 98 percent of Essar Oil, are paying less per share, than the promoters did to acquire 8 percent in the February 2016 delisting.
Ofcourse, if Essar Oil's debt has reduced since January, the equity value of the deal and hence the acquisition price per share will increase. BloombergQuint asked the company for information on that but has not received any response.
What About Ruias And The Banks?
Besides the Rs 42,800 crore that the Ruias, the Essar Group promoter family, get from the sale of Essar Oil, they will also get another Rs Rs 14,000 crore for the sale of a privately held captive port. The port is adjoining the Essar Oil refinery. That's a total of about Rs 56,800 crore, much of which, if not all, is expected to be used to settle the over Rs 1 lakh crore of debt the Group has.
The two biggest lenders to the Essar Group are reportedly State Bank of India and ICICI Bank. But the exact exposures are not publicly disclosed. Needless to say all lenders will hope to benefit from the Ruias' newly acquired cash rich position.
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