Company likely to go by enterprise valuation rather than market capitalisation for government stake.
The amount that will flow to the government’s kitty from the proposed acquisition of Hindustan Petroleum Corporation (HPCL) by ONGC could be around Rs 45,000 crore, 45% higher than the current market capitalisation of the government’s 51.1% stake in HPCL that will change hands under the deal. According to sources, after evaluating HPCL’s physical assets, marketing network, debt, investments and brand strength, ONGC has internally estimated the firm’s worth to be higher than its current market value. An email sent to ONGC on January 1 remained unanswered. For the Centre, which is facing shortfall in indirect tax receipts and also certain elements of non-tax revenue, the government-owned explorer’s move to go by the valuation method for the acquisition could come in handy. Against its 2017-18 disinvestment target of Rs 72,500 crore, the Centre has so far garnered Rs 54,000 crore. The oil explorer, the sources said, will pay the government through a mix of internal resources and debt raised through bonds for which it will be holding roadshows abroad. ONGC has reckoned that the value attributable to HPCL’s physical assets from the government’s entire 51.11% stake to be around Rs 15,000-20,000 crore. When marketing network and brand value is added, the valuation is around Rs 45,000 crore.
SBICAP and Citigroup have been appointed by ONGC as merchant bankers for the deal and Shardul Amarchand Mangaldas as the legal adviser. On its part, the government has appointed JM Financial as the transaction adviser and Cyril Amarchand Mangaldas as the legal consultant to prepare an information memorandum on HPCL. On July 19, the Cabinet Committee on Economic Affairs had given in-principle approval to the strategic sale of the government’s existing stake in HPCL to ONGC. This also included change in management control though HPCL will retain its brand as a subsidiary of the national oil explorer.
However, the payout method was unclear and it was reported that ONGC will pay as per the market capitalisation and the government could get around Rs 31,000 crore for its stake as per the current market share price of HPCL. ONGC’s chairman and managing director has recently said that the takeover process will be over by March. According to a person close to the development, HPCL definitely wants to go for valuation method as being a marketing company, its brand value matters. HPCL has a refining capacity of 24.8 million tonnes per annum and its share in the fuel retailing market among oil marketing companies is around 25%.
Before the process of issuance of bonds starts, ONGC will be undertaking roadshows around the world to check foreign investors’ mood and based on that it will come out with the amount to be raised. The company has already got shareholders’ approval to raise Rs 25,000 crore. ONGC does not have enough internal resources to finance the deal as it has entered into few big deals — Vankor, Mozambique and GSPC, apart from HPCL — in the recent past.