Essar Oil-Rosneft deal: Why it is a lost opportunity for Indian companies
Indian companies essentially allowed some foreign companies to profit from India's downstream oil industry growth story
India's debt-laden Essar Group confirmed on Saturday that it has agreed to sell a 98 percent interest in its Essar Oil unit to a consortium led by Russia's Rosneft, giving the energy giant a gateway into the world's fastest growing fuel market.
The deal will see Rosneft, along with its partners Trafigura and United Capital Partners (UCP), pay $10.9 billion for Essar's refining and retail assets. Separately, $2 billion will be paid toward the acquisition of the Vadinar port in the western state of Gujarat, along with certain import and export facilities.
Here are all the key facts about the deal:
What are the key aspects of the deal?
The deal will give Rosneft a 49 percent stake in Essar Oil, with 49 percent being split equally between Trafigura and UCP. It has been carefully structured to avoid falling foul of western sanctions against Russia over its role in the Ukraine crisis. According to a Reuters report, Rosneft will not get a controlling stake, partly because of sanctions.
The all-cash deal will give Rosneft and its partners control of Essar's 20 million tonne refinery in Gujarat, and its retail fuel outlets in India, where growth for refined petroleum goods in the next five years is expected to be in the 5 percent to 7 percent range.
It is also the biggest foreign acquisition ever in India and Russia's largest outbound deal, according to Thomson Reuters data.
How will the deal impact Rosneft and Trafigura?
According to Chief Executive Igor Sechin, the deal gives Rosneft entry into one of the most promising and fast-growing world markets. It gives "unique opportunities for synergies" with its existing assets. Separately, Rosneft said it would use Venezuelan crude to supply the Vadinar refinery.
According to Vandana Hari, energy sector analyst, the deal is a feather in the cap of Rosneft and Trafigura. "Given that the purchase gives them control of the entire downstream business of Essar Oil, the companies are getting a relatively new and sophisticated refinery and retail network, which will continue to play a critical role in serving a fast-growing captive market at home, besides being well-placed to compete in the export markets," she said.
Hari reckons that at a Nelson complexity index of 11.8, the 20 million mt/ year Vadinar refinery is capable of turning the dirtiest of crudes into high-quality Euro IV and V-grade refined products, assuring it relatively healthy refining margins.
How will it impact Essar?
The Essar group, with a presence in oil and gas, steel, ports and power, has been under pressure from its lenders to reduce its debt burden. The group, according to this report in Baron's Asia, has loans Rs 1.2 lakh crore debt. The deal will be help the group reduce its debt burden by Rs 75,000 crore, Essar director Prashant Ruia has told The Business Standard.
Apart from this, the group's assets will reduce by 30 percent with this deal and revenue by $10 billion to $17 billion, Ruia has told the BS.
The group will now focus more on its other businesses such as steel and ports, says a report in The Economic Times.
Why are Indian banks happier than Ruias, Rosneft, Trafigura and UCP?
Indian banks' stressed assets stands at Rs 8 lakh crore. Of this, five sectors, namely steel, power, teelcom, infrastructure and textiles, account for 61 percent. Banks have a mandate to clean up their balance sheets by March 2017 and have been pushing debt-laden companies to sell assets to repay loans.
Essar's debt has been one of the highest and the development has to be seen in this context. Welcoming to the development, Chanda Kochhar of ICICI Bank said, "This deal is also a significant step in the process of deleveraging the balance sheets of Indian corporates. ICICI Bank has been closely working with various companies including the Essar Group to help them deleverage their stressed balance sheets. We will continue working towards this objective with others.”
However, IDBI Bank's MD Kishor Kharat has been more measured in his reaction because as part of the deal the debt of Essar Oil will now become Trafigura or Rosneft's. "That is why I am saying that we need to understand how they are going to structure it entirely because if it is all cash deal and they are going to settle the lenders, it will be a different situation but if it is only the equities taken and then all debts are going to be transferred to new buyers, promoters, perhaps the situation will be different," he told CNBC-TV18 in an interview.
But did Indian Inc lose out?
As Kochhar of ICICI Bank says, the deal definitely means Indian energy sector is attractive. But that also means Indian companies lost out on a golden opportunity. “While the deal makes good sense for the buyers and the Ruias, who will now be able to pay off a substantial part of the Essar Group debt, I think India Inc loses. The country is essentially going to allow some foreign companies to profit from its downstream oil industry growth story," says Vandana Hari.
Why could that opportunity not have been exploited by the Indian refiners? she asks.
Data contribution by Kishor Kadam
With inputs from Reuters
The promoters see an enterprise value of Essar Oil of $10 billion
Essar Oil on Monday announced the closure of the company's sale, including its Vadinar refinery, to Russian state-run Rosneft-led consortium for $12.9 billion.
Minority shareholders of Essar Oil will get Rs 75.48 per share in addition to Rs 262.80 per share they had got on delisting