Details sketchy on Gujarat Gas amalgamation

Posted online: Thursday, Apr 24, 2014 at 0000 hrs
Gujarat Gas (GGAS) board has announced an amalgamation agreement with GSPC groupís other entities to form a larger gas entity. Both GGAS (and its two subsidiaries) and GSPC Gas (an unlisted CGD company) will be merged into GSPC Distribution Network (GDNL).

While the swap ratios have been announced, there are not many details on valuations, treatment of debt, reduction of GDNLís shareholding, etc. These will likely be announced at a later date.

Key details announced include: (a)All assets of GGAS, GSPC Gas and GGAS subsidiaries will be transferred to GDNL; (b) For each GGAS share, minority shareholders will get one GDNL share. For GSPC Gas shares, the swap ratio is 81:76; (c)GSPC Gasís current holding of 44.5% in GDNL will be extinguished. Also, the paid-up capital of GDNL will be reduced.

We use a DCF methodology to value GUJS, assuming a WACC of 11.6% and a terminal growth rate of 2.5%. Our DCF model covers cash flows from FY15F to FY25F. Our DCF-based target price is R70.

It is difficult to take a view as details are sketchy and recent rally too sharp. Our interaction with GGAS/GSPC indicates that post deal, minority shareholders in GGAS and GSPL (buy) will own ~25% of GDNL, while GSPC and other Gujarat government firms will have the other 50%.

Nomura