Cabinet clears HPCL stake sale to ONGC, but combo entity falls short of mega scale

By: | Published: July 20, 2017 6:31 AM

Deal seen as win-win for both companies; to contribute close to Rs 30,000 crore to divestment target.

HPCL, ONGC, Centre, ONGC CMD DK SarrafONGC CMD DK Sarraf told a TV channel that the firm has already chalked out the plan on how to fund the acquisition, but refused to elaborate.

State-run hydrocarbon producer ONGC will buy the government’s 51.1% stake in public-sector oil refiner-cum-marketer HPCL and make it a listed subsidiary, with the Cabinet on Wednesday giving in-principle nod for the transaction. The plan, in line with a policy announced in last Union Budget to create oil companies of global sizes, may not really achieve that as the combined entity will still be far smaller than global energy giants, but will be a win-win for both companies as their business risks will be mitigated.

The government will get close to Rs 30,000 crore or around 40% of this year’s projected disinvestment revenue from the deal, given HPCL’s current share price. The transaction may not trigger the market regulator’s open offer provision as HPCL’s ownership will remain with a state-owned entity. Buying an additional 26% in HPCL from the public shareholders would have cost ONGC another Rs 15,000 crore.

To raise funds for the transaction, ONGC may not have to stretch itself much. While a cash surplus of `10,000 crore will come in handy, the explorer may transfer its 71.62% stake in Mangaluru-based refiner MRPL to HPCL before acquiring the latter, a move that could fetch it around `16,500 crore. HPCL already has around 17% in MRPL so market borrowing by ONGC for lapping up HPCL may not be very large.

ONGC CMD DK Sarraf told a TV channel that the firm has already chalked out the plan on how to fund the acquisition, but refused to elaborate. He added that there might not be a need to appoint a valuer for HPCL as the firm has been listed for long and the market prices reflect its value. According to him, since the deal involves government’s share getting transferred to state-owned entity, an approval from minority stakeholders might not be required. Public holding in HPCL is 48.89%.

“It will give them (the oil PSUs which will be merged) capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders,” finance minister Arun Jaitley had said in the last Budget speech. However, even after the deal, the combined revenue of ONGC-HPCL will be around $46 billion compared with, say, $219 billion of ExxonMobil.

Following the ONGC-HPCL deal, the combined entity will have the requisite know-how, if not financial might, to compete with the large energy giants. ONGC’s vulnerability to fluctuations in global crude prices will be lessened as it extends to refining and marketing. As for HPCL, crude sourcing could become less costly. “Globally, all oil majors are integrated players. With HPCL coming in which will have refining and retailing capacity, the merged entity will have all the traits of a global player,” said RS Sharma, former CMD of ONGC, adding that the the new company will be able to absorb oil price volatility.

“The stakeholders are looking forward to the to-be integrated major ONGC-HPCL-MRPL and OVL as an opportunity for value creation in global markets, in the country markets and also internally within companies. For years to come, the conglomerate will try to be better than domestic and global rivals in areas like crude, gas, products, petrochemicals, infrastructure, trading, etc, in the market, and in people, technology, finance and likes within,” said Deepak Mahurkar , leader, oil & gas, PwC India.

However, there are experts who differ. Former Planning Commission member Kirit Parikh had argued against the government’s move. “When these activities are combined into one unit, inefficiency in one activity can be hidden by the efficiency of another. This reduces the incentive to be efficient for the loss-making company and reduces resources for growth and investment for the profit-making company,” Parikh wrote in The Times of India.

Then oil minister Mani Shankar Aiyar was the first to moot the idea of merging upstream and downstream companies in 2004 to create integrated companies, but the idea did not find much support and was eventually dropped.

FE had on May 31 reported that in order to keep the brand names of ONGC and HPCL intact, the government will go for a subsidiary model wherein the latter will become an arm of the former, rather than carrying out the proposed merger of the two entities.

Separately, the Cabinet also approved an alternative mechanism for the creation and launch of a new exchange-traded fund through which the government could disinvest a portion of its holding in public sector banks, financial institutions and insurance companies.

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