State-run oil explorer Oil and Natural Gas Corporation Ltd. (ONGC) is expanding its forward linkage with a buy-out government's entire stake in refining and oil marketing company Hindustan Petroleum Corporation Ltd. (HPCL).
The union cabinet is reported to have given its in-principle approval to sell 51 per cent stake in HPCL to ONGC.
However, there was no clarity yet on the price that ONGC will pay for the acquisition. "We believe long-term holders should get concerned as the deal gets closed and HPCL becomes a subsidiary to ONGC, which does not have such a good track record on capital allocation", the note said. HPCL will retain its brand after its acquisition by ONGC.
Prior to the merger, HPCL is likely to take over Mangalore Refinery and Petrochemicals (MRPL) to bring all the refining assets of ONGC under one unit. "HPCL stake value to be decided by buyer and seller". ONGC, which has cash reserves of Rs 13,014 crore, also has an option to sell part or all of its 13.77 per cent stake in International Olympic Committee which is worth almost Rs 25,000 crore. The merger deal is expected to be valued at almost Rs 30,000 crore and it is likely to be completed within this financial year. Under India's takeover code, if a company acquires more than 25% of another listed entity, it has to make an open offer to buy at least 26% more.
ONGC chairman and MD Dinesh K. Sarraf said the funding plans for the acquisition are in place but refused to reveal them citing market sensitivities.
Finance Minister, Road and Transport Minister and Oil Minister will be a part of the merger panel. Sarraf said there was a strong case for merging MRPL, which ONGC had acquired in March 2003 from AV Birla Group, with HPCL but no modalities have been worked out yet.
"We propose to create an integrated public sector "oil major" which will be able to match the performance of worldwide and domestic private sector oil and gas companies".
"Minority holders of HPCL may not see an open offer while those of ONGC may not be able to prevent net leakage equal to over 8-11 per cent of the current stock price", it had said.