The valuation of HPCL should be done prior to ONGC acquiring the firm “as there is more intrinsic value in HPCL than its market capitalisation,” the oil marketer’s CMD MK Surana told FE. Also, he said, the merger of Mangalore-basd refiner MRPL with HPCL might not happen before the ONGC buying 51.1% government stake in HPCL to make it a subsidiary.
However, when contacted, ONGC’s CMD D K Sarraf, who had earlier said HPCL shares would likely be acquired at market prices, told FE: “If the seller (the government) wants to have a valuer, it can go ahead. However, the final call will be that of the two companies as the valuer will not be the deal maker.”
Though at current prices, the chunk of HPCL equity to be acquired by the upstream company is pegged at close to Rs 30,000 crore, the actual deal value would depend on whether an independent valuation will be done of the oil marketer and whether ONGC’s 71.62% in MRPL will be transferred to HPCL prior to the acquisition.
Apart from the fuel retail and refining business, Navratna enterprise HPCL operates 44 liquefied bottling plants across the country with a capacity of over 3,610 thousand metric tonne per annum and operational product pipelines of 2,514 km apart from other assets and investments.
HPCL’s Surana said the deal with ONGC would brighten the chances of MRPL coming to HPCL and it made sense for MRPL as well as it does not have marketing business. “It will increase our refining capacity and operational efficiency at the same time de-risking the model,” he added. HPCL’s current share in the country’s oil refining sector is a mere 7%.
However, Surana opined that the MRPL merger should happen after the deal with ONGC otherwise the deal value for the explorer will go up. “It does not make sense for MRPL-HPCL merger to happen before ONGC-HPCL deal as the deal value for ONGC will go up and it will be a circuitous transaction,” Surana said. ONGC holds 71.62% in MRPL valued at around `16,500 crore. In case MRPL merger is triggered, HPCL will have to pay ONGC the amount and in turn ONGC will have to pay a bloated price for HPCL.
“Though it is between the buyer (ONGC) and seller (government) (to take a call on whether MRPL-HPCL merger should precede ONGC-HPCL deal) in my opinion a valuation should be done as there is more intrinsic value in HPCL than is reflected in the stock price. We have various joint ventures, lube and emulsion businesses, pipeline network, depots, LPG bottling plants, colonies, among others, which do not fully reflect in the market price,” Surana said.
Sarraf clarified that both companies will have to decide whether to go ahead with the MRPL deal or not ahead of the ONGC-HPCL acquisition. “Right now we are not even considering the MRPL issue and concentrating on HPCL deal,” said Sarraf.
An analyst, who did not want to be named, with an auditing and consulting firm, too, believes that the value of the company is higher than the market price as there will be automatic hedge for the buyer in terms of oil price fluctuations, among others. “It will also be unfair for the minority shareholders as they will not gain from the deal,” the analyst added. An open offer for these shareholders is unlikely to be done, though Surana added, “The companies will be guided by legal counsel in accordance with the Sebi Act and the Companies Act to decide whether there should be an open offer or not.”
According to Surana, the government’s nod to the deal removes the level of uncertainty from the system which is good for the country and it heralds the beginning of more such integration happening.
Some experts don’t see merit in such consolidation. “ONGC parentage could mean interference, highly probable participation in upstream and, more importantly, dilution of a high-performance culture (at HPCL),” Ambit Capital said in a note on Tuesday.