After a prolong slump, oil and gas sector is gearing up for merger and acquisition spree. Russian oil giant Rosneft and Swiss commodity trader and metal company Trafigura jointly acquired 98.13 per cent stake in Essar Oil in a largest FDI deal valued at USD 13.9 bn. Just a few hours ago French oil giant Total SA had acquired danish conglomerates oil business valued at 7.9 bn USD.
These two mega mergers are valued at $ 20 bn, dwarfing last two years moribund state of M&A space. Rosneft completed its first Asian oil refining acquisition with 49.13 per cent stake. The deal will help Essar group halve its debt to Rs 70,000 crore. It includes repayment of Rs 32,000 crore to the main lenders of groups offshore holding company Essar Global Holdings, now renamed as Essar Global Fund. They include Russian lender VTB, ICICI and Axis Bank. Essar Oil was valued at Rs 2,000 crore when it was listed in 1995. Now it's valued at around Rs 50,000 crore!
The deal is the largest in corporate history and the first mega merger in oil and gas space. It has come as a wake up call for existing players. It's the first Asian oil acquisition for Rosneft and will provide it access to one of the fastest growing markets. It would strengthen Trafigura's existing business of trading and also create a synergy as both these players are highly competent in their respective domain. The deal may force the state PSU to consolidate and may revive proposal of mega-merger among all State PSUs.
The deal includes Essar's oil refinery at Vadinar with 20 MMTA capacity, Vadinar oil terminal with installed capacity of 58 million ton, a power plant having 1010 MW capacity and distribution network of 3500 petrol pump with scalability up to 6000 outlets. Essar will have no compete agreement with Rosneft-Trafiguara for oil and gas sector. Essar would now focus more on its other core business such as steel, ports, coal based methane and other verticals. The deal was signed in the presence of Prime Minister Narendra Modi and Russian President Vladimir Putin during the BRICKS summit in last October, but delayed due to some concern by intelligence agencies and reluctance of some lenders.
The Joint Lenders Forum, led by State Bank of India (SBI) and ICICI Bank and comprising 23 banks in total, on Friday finally approved and authorised the release of Essar Oil shares to facilitate closure of the deal. The deal’s consummation paves the way for the Essar group to reduce its debt. Rosneft, along with Russian private fund United Capital Partners (UCP) and Swiss commodity trading firm Trafigura, are buying 49.13 per cent each in Vadinar refinery (India's second largest refinery) and Vadinar port in Gujarat. The remaining shares will be held by minority shareholders after delisting of Essar Oil. Essar Oil will pay an "additional amount" to the shareholders who tendered shares when the company was delisted in June 2014.
On the front of Rosneft stake, Russia’s VTB Bank will lend Essar $3.9 billion to restructure debt, while Rosneft itself will pay about $3.5 billion to Essar. The refinery accounts for almost 9 per cent of India’s total oil refining output, according to Essar. Snapping up the refinery would get Rosneft a strong foothold in the world’s fastest growing fuel retailing market where oil demand is expected to grow 5-7 per cent in the next five years, as per industry estimates. This is the largest foreign investment in India till date. Deal has boost valuation in refinery sector as BPCL, IOC, HPCL are up more than 5 per cent. Analysts expect the Ruia family to also pay at least partially, the $2.5 billion outstanding they have with the Iranian government. The transaction will help Essar deleverage its balance sheet by half in one shot and will also enable the promoter holding company to retire debt. Axis and ICICI which together have a $1.6-billion exposure help bank to reduce their NPA.
The mega merger may trigger further acquisition in the Indian oil and gas space. Malaysian oil and gas giant PETRONAS Berhad is interested to buy stake in Indian Oil Corporation's Ennore LNG capital. Rosneft may import oil from Venezuela and refine in India. It may change Indian oil import dynamics. Rosneft and Trafigura are cash rich and both companies are famous for their competitiveness in their respective domain. Trafigura is a very strong commodity trader with diverse interests in metals and energies.
The synergy and cash rich duo has also created serious challenge for exiting oil and gas companies including state PSUs. Since oil and gas sector is having its unique challenges like highly capital intensive nature, technological challenges, price volatility and geopolitical country risks as well as major business cyclical risk, and the competition is fierce, merger, acquisitions and consolidation have become survival condition for many players. Many western giants like Exxon mobile and ConocoPhillips and Asian giants like China Petroleum Sinopack are merged entity. Rosneft-Trafguara will compel existing to collaborate instead of compete. Deal may rekindle mega merger plan of state PSUs. If this happens, It may unleash a clash of titans. Indian consumers will be certain winner out of this fight.
(Author is the CEO of Paradigm Commodity Advisors, a research boutique which provides risk management and strategic advisory in commodities, forex and major markets.)
