Ruchi Agrawal Moneycontrol Research
The board at Gujarat State Petronet Ltd (GSPL) has approved plans to buy 3.91 crore share or a 28.4 per cent stake in GGL (Gujarat Gas Ltd) from its parent GSPC (Gujarat State Petroleum Corporation). While Gujarat Gas saw some positive movement, post the announcement, the GSPL stock saw a rocky day on the bourses, tumbling nearly 6 per cent intraday. Here, we analyse the synergies of the deal and what it holds for the various stakeholders.
The deal
GSPL has approved the purchase of another 28.4 per cent stake in Gujarat Gas from its parent company GSPC. The purchase would push up GSPL's stake in Gujarat Gas to around 54 per cent from the current 26 per cent. Though the exact deal price has not been confirmed yet, at Tuesday's close price of Rs 832, the value of the 28.4 per cent stake comes to around Rs 3,244 crore.
The transaction will be completed through inter-se transfer between group companies and thus may not trigger an open offer. Being a related party transaction between two government companies, there would not be any mandatory requirement of regulatory approvals. With a 54 per cent stake post the deal, Gujarat Gas would become a subsidiary of GSPL. There are no talks of a merger and both companies would continue to be listed separately.
Synergies for the companies
Gujarat Gas is one of the largest downstream gas company and with its vast network of city gas distribution (CGD), strong standing in industrial supply and the last mile connectivity it has a dominant presence in West India, especially Gujarat.
GSPL, on the other hand, is a leading player in developing energy transportation infrastructure and connecting natural gas supply basins and LNG terminals with a pipeline network of around 2,600 km.
City gas distribution is one of the largest segment which GSPL caters to currently. Thus, GGL's business is complimentary to GSPL and the transaction would facilitate better synchronisation of GSPL's gas transmission business and GGL's downstream gas connectivity.
With the governments increasing thrust on promoting the use of cleaner fuels, natural gas and city gas distribution has been receiving a strong push and is poised to grow in the future. The 9th round of bidding for CGD projects is currently on and the combined entity would be in a better position to bid.
The GSPC side
Speculated by many as one of the core purpose of the deal, GSPC would see some relief by offloading a substantial portion of the nearly Rs 16,500 crore debt on the balance sheet. With almost a 3200 crore repayment, the transaction would enable a better capital structure and reduced finance costs for GSPC.
Deal financials and impact
The deal value at Tuesdays close price of Rs 832 comes at around Rs 3,244 crore. Although the exact price and contours of the deal are not yet finalised, but assuming the deal is wholly financed through debt, it would mean an additional debt of Rs 3,244 crore for GSPL.
GSPL currently has minimal debt on its balance sheet with a debt equity ratio of 0.1x. Borrowing of Rs 3244 crore would take the debt equity profile to almost 0.9x pushing up the leverage thereby limiting any big inorganic growth prospects for GSPL.
Higher debt would mean an uptick in the finance cost to an extent of around Rs 250 crore. This increase in costs would dilute earnings and impact return ratios of GSPL.
Overall, the deal although synergistic comes at a significant cost for GSPL. Though in the long run it would be beneficial for both companies. Follow @Ruchiagrawal
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