Why Vedanta May Desperately Need A BPCL
Vedanta Ltd. joined the race for acquiring state-owned Bharat Petroleum Corp. three months after its failed delisting and when analysts have flagged risks about its leverage. Yet, billionaire Anil Agarwal needs the oil refiner more than ever.
The output from its oilfield in Barmer, Rajasthan has been falling. It also produces a waxy crude that state-run refiners refuse to take despite the mandate to buy as part of the oil exploration contract. Vedanta ends up selling more than 75% of it to private companies including Reliance Industries Ltd. and Nayara Energy at a discount.
A potential acquisition of BPCL will give Agarwal’s conglomerate a cash-rich refinery business with a retail network and a 22% share in the market. That can help boost the flagging oil and gas unit.
Agarwal bought Cairn India from Cairn Plc. in 2011 for more than $8.5 billion. The group later consolidated all companies, excluding Hindustan Zinc, under Vedanta. The average oil output from Barmer peaked in 2014 at 218,651 barrels of oil equivalent a day. The output, however, has since declined despite $1-billion investment.
That forced the company to lower its targets from 270,000-300,000 units a day in FY19 to 225,000 in FY20 and 190-195 in FY21.
Yet, the acquisition would require cash when Vedanta’s own financial leverage has been rising.
At Dec. 28 closing price, the government’s 52.98% in BPCL is worth more than Rs 44,400 crore. Also, an acquirer would have to make an open offer for the 26% stake from the public, costing additional Rs 21,700 crore. This is excluding BPCL’s 61% holding in the Numaligarh refinery.
To be sure, Vedanta has cash of around Rs 35,560 crore on a consolidated basis as of September. But its financial leverage has risen since 2016-17 fiscal.
Vedanta’s Cash On Books
The balance sheet and uncertainty among minority shareholders around dividend may put downward pressure on the company, Citi said in its second-quarter earnings review.
Moody’s Investors Service in a note said Vedanta Resources’ failed takeover of Vedanta heightens refinancing risk and is credit negative. A successful takeover of Vedanta would have enhanced the access to Vedanta’s cash flow, improving bond yields and refinancing options, it said.
BPCL Can Pay For Itself
According to Rakesh Arora, a commodities sector veteran, the main rationale behind Vedanta’s BPCL bidding could be attractive valuations and high dividend yield. It, he said, can be a leveraged buyout and a potential candidate for asset sweating — the process of increasing profits generated from a company’s assets.
JPMorgan in a report said BPCL dividends could easily cover the cost of debt of any acquisition. Though Vedanta has no experience in running refining and fuel marketing but has been able to create significant value from state-owned companies, it said.
Agarwal has earlier acquired and turned around three state-run units — Hindustan Zinc Ltd., Sesa Goa Ltd. and Bharat Aluminium Co.
According to JPMorgan, a special purpose vehicle with additional partners would allow spreading the risk. Vedanta is said to be following that model for a potential acquisition.
Bloomberg reported that Agarwal is planning to invest $10 billion by teaming up with London-based Centricus Asset Management Ltd. to seek investments in Indian companies, offering substantial growth opportunities. With BPCL being one of its targets, Vedanta group has been planning a fund with a 10-year lifespan that will use a private equity-type strategy, buying into companies and boosting their profitability before seeking an exit, the report said.