HPCL gains over 6%, while IOC, ONGC fall as brokerages dissect deal dynamics
Brokerages highlight how the deal would be beneficial for HPCL, but would pressurise ONGC due to increased debt prospects. Stake sale in IOC and possible next acquisition of another energy major could strain IOC.
In the backdrop of mergers and acquisitions (M&As) buzz in the oil and gas space, oil marketing companies (OMCs) have been reacting in a varied manner on the stock markets.
Meanwhile, they turned cautious on the rest as the deal would mean more trouble or pain for these two.
Oil minister, Dharmendra Pradhan, on Wednesday said that the merger between the two companies will be completed in the current financial year, CNBC-TV18 reported, quoting agencies.
It was reported by news agency PTI earlier this month that the government was looking to sell 51 percent stake in HPCL to ONGC for over Rs 26,000 crore.
After the Cabinet nod, the government could move to appoint valuation and transaction advisers while ONGC too may decide to hire merchant bankers to arrive at the valuation of government shareholding.
ONGC is said to have a cash reserve of Rs 13,014 crore and to fund the government stake acquisition in HPCL, it will have to borrow at least Rs 10,000 crore, the source said.
Major global brokerages highlighted the good times in store for HPCL, but said that the deal could mean tough times for IOC and ONGC. Moneycontrol takes a look at what are their views on the transaction.
The global financial services firm said that given that such a transaction could be considered as an inter se transfer of shares among promoters, it may not require minority shareholder approval and may also not trigger a mandatory open offer. But, minority shareholders in both the companies could have a say in such transactions, it added.
HPCL’s minorities, the report stated, may argue for a valuation exercise to be conducted to determine a fair value for the stock and ascertain whether a control premium is warranted. “The government’s likely intention (as reported) to seek the opinion of independent valuers and also to seek exemption from an open offer may therefore indicate prudence on its part as both issues could be contentious for minorities,” Citi’s report added.
Furthermore, it highlighted how ONGC could have to sell its stake to fund the acquisition. It quoted media reports which said that the energy major could consider selling 13.8% stake in IOC. “This could make logical sense for ONGC given the value of its stake equals USD 4.1 billion, almost equal to the value of the 51% government’s stake in HPCL ($4.3bn at CMP),” the firm wrote in its report.
Citi further said that the developments of strong fuel consumption trends and daily fuel pricing are positive. “While Q1 may be impacted by inventory losses, we would urge investors to look past these as one-offs,” it added.
CLSA too quoted media reports about the deal completion by the fiscal year-end. Moreover, it also highlighted how ONGC’s debt could rise on the back of this proposed transaction.
“More importantly, it would create a holding company structure for ONGC that implies possible value leakage of up to Rs 6.5/sh (4% of the current price) using a 50% premium for HPCL’s current price and assuming the market assigns a holding company discount (say 20%),” analysts at the firm wrote in their report.
Meanwhile, on minority shareholders, it said that since this is a government-to-government transaction, it may not require any specific approval from the minority shareholders.
On monetizing its stakes, it said that along with ONGC’s plan to sell stake in IOC, the government also plans to sell some of its 57 percent in IOC. “We see overall supply of USD 6 billion or 20 percent stake in IOC in the near to medium term which may act as a huge overhang for the stock,” the report added.
Further, it said that the activity could lead to many such transactions. Within the oil space, it said, IOC could be the next big company which may be asked to acquire the smaller Oil India. “If proposed, like ONGC, it would lead to value leakage for IOCL and be a negative,” the report said.At 13:12 hrs Hindustan Petroleum Corporation was quoting at Rs 374.80, up Rs 15.50, or 4.31 percent on the BSE. Meanwhile, Oil and Natural Gas Corporation was quoting at Rs 159.85, down Rs 3.00, or 1.84 percent, while IOC was quoting at Rs 380.60, down Rs 12.10, or 3.08 percent.