Will The $12.9 Billion Deal To Sell Essar Oil Rescue The Ruias?

A group led by Russian energy giant Rosneft has agreed to buy 98 percent stake in the Ruia-controlled Essar Oil, the companies said in a statement on Saturday. The deal, which has been in the works since July 2015, is expected help the Essar group reduce debt by half.

The transaction includes $10.9 billion paid for Essar Oil’s refining and retail assets and another $2 billion for the Vadinar port linked to the refinery and related infrastructure, the statement said.

The deal includes the signing of two different definitive agreements. As part of the first agreement, 49 percent stake will be sold to Petrol Complex Pte. Ltd, a subsidiary of Rosneft. The second agreement will include the sale of another 49 percent to Kesani Enterprises Company Ltd, owned by a consortium led by Trafigura and United Capital Partners.

According to the company’s website, Essar Oil has a portfolio of onshore and offshore oil and gas blocks with about 1.7 billion barrels of oil equivalent in reserves and resources. It also owns the Vadinar refinery with a capacity of 20 million metric tonnes per annum (MMTPA). The company is also active in the private fuel retailing business and has about 2500 branded retail outlets.

The deal between Rosneft and Essar Oil represents the largest inbound foreign direct investment, said the statement released by the two companies.

What The Deal Means For Shareholders?

Essar Oil delisted from the Bombay Stock Exchange (BSE) on December 30, 2015. Then it had a market capitalisation of Rs 38,000 crore, i.e., $5.75 billion. 10 months after the delisting, the promoters have struck a deal valuing the business at nearly $13 billion. Prashant Ruia, director of Essar Group, however, indicated that the equity value as part of the deal will not be very different from the delisting price.

Essar’s erstwhile minority shareholders will also benefit from any appreciation in value, thanks to a SEBI order in November last year that directed Essar Oil’s promoters to compensate shareholders exiting via the delisting by paying them the difference, if any, between the delisting price of Rs 262.80 and the acquisition price determined when the deal is finalised.

Shareholders have to be compensated within two months of the final deal announcement.

Easing Essar Group’s Debt Burden

The deal comes as a significant relief to the Essar Group which has seen debt levels surge over the past few years. According to Credit Suisse’s October 2015 House of Debt report, the group had an aggregate debt of over Rs 1 lakh crore in fiscal year 2015. The group’s interest coverage ratio remained below one in fiscal 2014 and fiscal 2015, according to the report. An interest coverage of less than one indicates that earnings are inadequate to cover debt repayments.

In particular, lenders are struggling to find a way to resolve stress in the case of Essar Steel. The steel unit alone has over Rs 40,000 crore in debt and a number of its outstanding debt instruments have a D rating, which suggests default or imminent risk of default.

The proceeds from the deal with the Rosneft-led consortium could help the group deleverage and regularize interest payments.

The deal will help reduce the overall debt of the group by 50 percent, said Prashant Ruia.

Commenting on the deal, Chanda Kochhar, managing director and chief executive officer of ICICI Bank said the deal is one of the largest foreign acquisition in India and added that it will help the group deleverage. ICICI Bank has significant exposure to the Essar Group. BloombergQuint could not ascertain the amount of loans granted by ICICI Bank to the Essar Group.