ONGC HPCL mega oil PSU merger approved: Minority shareholders lose, but who wins?

By: | Published: July 20, 2017 12:48 PM

The government has left the minority shareholders of HPCL flummoxed by deciding to not share with them the gains arising out of the company’s mega acquisition by ONGC.

ONGC, a state-run company itself, will buy the government’s 51.1% equity stake in HPCL, effectively leaving the latter’s ultimate ownership with the government. (Image: Reuters)

The government has left the minority shareholders of HPCL flummoxed by deciding to not share with them the gains arising out of the company’s acquisition by ONGC, as the Union Cabinet, while approving the buyout yesterday, exempted the deal from the mandatory open offer for public shareholders.

Capital markets regulator SEBI’s (Securities and Exchange Board of India) rules allow the acquirer not to make an open offer in the case of stake sale in the government companies, if the ultimate ownership remains the same and the premium paid for the acquisition is less than 25% above the market value.

In this case too, ONGC, a state-run company itself, will buy the government’s 51.1% equity stake in HPCL, effectively leaving the latter’s ultimate ownership with the government. The biggest flags for the minority shareholders may have come from ONGC Chairman D K Sarraf’s comments yesterday, whereby he said that there will be no independent valuers for the deal, no approval from the minority shareholders would be sought, and there would be no open offer.

HPCL shareholders are disappointed …

HPCL sharers fell on the news, tumbling as much as 5% to Rs 364.75 in the opening trade on BSE today, reflecting the shareholders’ disappointment. Most brokerages too expressed their angst over the modalities of the deal. On the other hand, ONGC shares rose, surging 2.9% to Rs 167.8 as the exemption from open offer to buy up to 20% of HPCL’s equity share from the public was seen as a positive for ONGC, which will not have to shell out extra money on buying additional equity shares beyond the 51.1% controlling stake.

Also read: Analysts’ take on should you ‘buy’ or ‘sell’ ONGC, HPCL shares as Cabinet OKs mega buyout but waives open offer

For HPCL, the trouble seems not only in the absence of open offer, but also in the change of ownership without any benefits of synergy between the two businesses. Instead, the acquisition might end up weakening the high performance culture at HPCL and increase interference in its operations, research and brokerage firm Ambit Capital said in a research note earlier this week.

“ONGC parentage could mean interference, highly probable participation in upstream and, more importantly, dilution of a high-performance culture,” Ambit Capital said in a note on Tuesday. “We believe long-term holders should get concerned as the deal gets closed and HPCL becomes a subsidiary to ONGC, which doesn’t have such a good track record on capital allocation,” it added. Ambit Capital raised the concern that HPCL has little to gain from merging with ONGC, specially in a scenario where the crude oil prices are unlikely to rise above $60 per barrel anytime soon.

… But why are ONGC’s shareholders happy?

Another brokerage Kotak Securities, which has a ‘reduce’ rating on HPCL shares with a target price of Rs 380, today said that HPCL shares may reverse the sharp 12% rally seen over the last one week. Further, yet another brokerage IIFL said today that the deal does not have any positive for the shareholders of HPCL, as nothing changes from their perspective.

Also read: Modi’s giant oil PSU plan takes shape as Cabinet approves ONGC HPCL merger

At current market prices, acquisition of HPCL’s 51.1% equity stake would cost ONGC Rs 29,000 crore, with the money going to the government coffers. This would eventually lead to an increase the debt levels for ONGC, which seemingly benefits from the coming of HPCL into its fold. Lack of operational or financial synergy will result in higher leverage for ONGC, Kotak Securities said today. Ambit Capital estimates that funding the acquisition would raise ONGC’s debt-to-equity ratio to 0.4 from 0.2 now.

Further, if the government insists on commanding a 40%-50% premium over the fair market price for its HPCL stake, as was reported by ET Now earlier this month, the leverage for ONGC could rise even further if it funds the buyout using debt. However, given the government’s keen interest in avoiding an open offer, it seems unlikely that it would ask for a share price premium of more than 25% over HPCL’s market cap.

ONGC could also sell its equity shareholding in another state-run giant refiner Indian Oil Corp to fund HPCL buyout, Kotak Securities said. ONGC holds 13.8% equity in Indian Oil, which is incidentally valued at about the same as HPCL’s 51.1% equity stake — Rs 30,000 crore.

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