Govt clears HPCL sale to ONGC, may mop up Rs 28,000 crore

HIGHLIGHTS

  • This is the harbinger of more such merger and acquisition (M&A) activities in the oil sector
  • ONGC will become the third-largest refiner in the country after Indian Oil and Reliance Industries Ltd.
  • Going by HPCL’s present market value, ONGC may have to shell out Rs 28,000 crore to the government

NEW DELHI: The government on Wednesday approved in-principle sale of Hindustan Petroleum (HPCL), the country’s third-largest refiner-retailer, to flagship explorer ONGC with the aim of creating an integrated Indian oil company with global size and heft.

This is the harbinger of more such merger and acquisition (M&A) activities in the oil sector, top government functionaries said after the Cabinet‘s panel on economic affairs cleared ONGC’s proposal to acquire the government 51.11% stake in HPCL amid indication that northeast explorer Oil India Ltd may go to the country’s largest state-owned refiner retailer Indian Oil next.

ONGC will follow the holding company route and not merge HPCL with itself after acquiring the government’s stake. HPCL will continue as a listed subsidiary of its new parent, which will become a truly integrated entity that will be better equipped to tide over the ebb and flow of prices in the oil production and refining-marketing businesses.

Going by HPCL’s present market value, ONGC may have to shell out Rs 28,000 crore to the government. This will help the government meet 38% of its Rs 72,500-crore disinvestment target of 2017-18 without actually losing control over HPCL.

ONGC’s acquisition cost could have risen by another Rs 14,600 crore or so, since the acquisition would trigger the market watchdog Sebi’s clause for making an open offer from HPCL’s minority shareholders. But the ONGC brass exuded absolute confidence that the government would ensure a waiver.

A ministerial panel, including finance minister Arun Jaitley, road transport minister Nitin Gadkari and oil minister Dharmendra Pradhan, will oversee the deal so that it is completed within this financial year.

“It (the deal) is strongly positive from all aspects for both ONGC and HPCL. The acquisition allows ONGC to become truly integrated with presence through the hydrocarbons value chain, something the company has been trying since its acquisition of MRPL,” former ONGC chairman R S Sharma, who heads industry body Ficci’s Hydrocarbon Committee, told TOI.

With HPCL under its fold, ONGC will become the third-largest refiner in the country after Indian Oil and Reliance Industries Ltd.

Sharma said the holding company structure, instead of a merger, is most appropriate in the prevailing situation. Under this structure, acquisition by ONGC will be an upside for HPCL since as a subsidiary it can leverage the state-run parent’s balance sheet for raising funds at more attractive terms for its expansion.

The only problem, as Sharma saw it, could be for ONGC in raising funds in the short term. “But ONGC is with a rock solid company… it will not be problem really.” Besides, ONGC can also sell its 13.8% stake in Indian Oil, the country’s largest state-run refiner-retailer.

ONGC will, as part of the entire transaction, shift its refining subsidiary MRPL under HPCL’s umbrella. ONGC holds 71.63% in MRPL, while HPCL owns 16.96% in the Mangalore-based company that runs a refinery with an annual capacity of processing 15 million tonne of crude. HPCL has two refineries at Mumbai and Visakhapatnam in Andhra Pradesh with a collective refining capacity of over 14 million tonne per year.

 

The government had laid the roadmap for the deal in this year’s Budget, with Jaitley saying in his speech: “We see opportunities to strengthen our CPSEs (Central public sector enterprises) through consolidation, mergers and acquisitions. By these methods, the CPSEs can be integrated across the value chain of an industry. It will give them capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders. Possibilities of such restructuring are visible in the oil and gas sector.”

Soon after the Budget announcement, ONGC looked at HPCL and the country’s second-largest refiner-retailer Bharat Petroleum (BPCL) — which also has an attractive exploration portfolio — for acquisition. It settled for HPCL as a more reasonable acquisition target as BPCL was more expensive.

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