The group plans to take Essar Ports, Essar Shipping and Essar Oil private over the next couple of years, the people said on the condition of anonymity. The Ruias are already in the process of delisting Essar Energy from the London Stock Exchange.
Mumbai-based Essar Group wants to buy all the shares it doesnt already own in its listed units as it considers them undervalued, the people said. The conglomerate is weighing the sale of international outsourcing operations and a US iron-ore business and may sell additional assets after completing the privatisations, the source said.
This (looking at a potential delisting of entities within the group) has been the thinking internally for some time now, said another person familiar with the development. He declined to be identified since the matter is sensitive.
There are two main reasons behind this line of thought, said the source. First, the three main firms of the software-to-shipping Essar Group Essar Shipping, Essar Ports and Essar Oil have lost significant market value over the last few years and the promoters see this as a good opportunity to consolidate their holdings in these firms. With the imminent establishment of one of the most stable governments at the Centre in the history of Indian politics, under the leadership of an investor-friendly Narendra Modi, key areas of the Indian economy, such as infrastructure, are expected to get a massive push. Consequently, companies engaged in infrastructure services and creation (like Essar Ports and Essar Shipping) are expected to do well going forward.
When these companies start doing better and overall valuations improve with a recovery in the economy, the promoters may look at divestment of their stake in the future again, maybe to private equity firms, the person said.
The second reason for any potential delisting, according to this person, could be increased complexities in ensuring compliance with the provisions of the new Companies Act 2013.
The new Companies Act, which came into effect after Parliament ratified it in August, gives minority shareholders greater say in a firms dealings, especially those linked to related party transactions and equity transfer within the promoter group.
Essar Group hasnt always had a cordial relationship with the minority shareholders of its group firms. The proposed delisting of Essar Energy from the London Stock Exchange was met with strong opposition from minority shareholders.
Apart from minority shareholders, which included Henderson Global Investors and Standard Life, Ruia's price for the open offer faced opposition from the Association of British Insurers (ABI), which is among the largest shareholder groups in the UK.
The Ruia brothers are overhauling Essar Group as family-run companies, including Jaypee Group and GMR Group, come under pressure to sell assets after racking up debt. The units Essar Group is seeking to privatise have a combined market value of about $4.4 billion, data compiled by Bloomberg show.
As a policy, Essar doesnt comment on speculation, it said in an e-mail in response to queries on delisting and the iron ore business.
Essar Groups debt had quadrupled to R98,400 crore by the end of March 2013, from R24,600 crore in 2007, according to a Credit Suisse report.
Essar Group said at the time such snapshots are an unfair measure of the health of industrial groups, given they show just the costs of investments, not the future income from these investments. The conglomerates units are refinancing high-cost rupee loans with dollar debt and overseas income provides a natural hedge, it said.
Essar Ports trades at 8.7 times last years earnings while rival Adani Ports & Special Economic Zone is valued at 27.1 times, according to data compiled by Bloomberg. Shares of Essar Oil have tumbled 83% in the six years through 2013, compared with a 4.4% rise in the benchmark S&P BSE Sensex index.
After privatising the units, the Ruia brothers plan to manage their holdings like private-equity investments and may buy or sell assets, the people said. Essar Group plans to freeze major capital expenditure for the next couple of years, according to sources.
Essar Group has spent $18 billion over the last six years and most of these investments have been completed, it said in its e-mailed statement. Essar Energy plans to invest in Essar Oil, the company said, without specifying the amount.
The group plans to sell some of the international operations of its call-centre and business outsourcing unit Aegis and is seeking an enterprise value of $600 million, the people said. Essar isnt considering a sale of Aegis and is focusing on expanding that business, it said in the e-mail statement.
Essar Group attempted to delist Essar Oil and Essar Shipping in 2007 before dropping the plans.
Meanwhile, all three units in their communication to the BSE categorically denied receiving any such proposal from the promoters.
(With inputs from agencies)