Top Indian oil explorer may raise $5.48 billion to buy HPCL

By Debjit Chakraborty and Saket Sundria on 1/22/2018

NEW DELHI and MUMBAI (Bloomberg) -- India’s biggest oil and gas explorer has widened its first debt-raising plan to as much as $5.48 billion to buy state-run refiner Hindustan Petroleum Corp.

Oil & Natural Gas Corp.​’s board has approved raising as much as 350 billion rupees in loans to buy the government’s 51.1% stake in HPCL, Chairman Shashi Shanker said in New Delhi on Sunday. That would be a 40% increase from its plan last year to raise 250 billion rupees. The state-run explorer said Saturday it will pay 369 billion rupees in cash for the stake.

The acquisition is part of a plan to create an oil major that was first outlined by Finance Minister Arun Jaitley while presenting the federal budget in February last year. The stake sale will help the government meet more than of half of its asset-disposal plan for the year to March 2018 and is crucial for narrowing its budget gap.

“We will use our cash first and then the liquid assets and debt will be last,” Shanker told reporters. "This order can change, because we won’t sell the liquid assets in distress. Also, we have offers for over 500 billion rupees debt at very competitive rates, both foreign currency and local."

The company currently has about 130 billion rupees in cash reserve, Shanker said, adding that the company could also sell the shares it holds in India’s biggest refiner Indian Oil Corp. and state-run gas utility GAIL India Ltd. ONGC holds a 13.8% stake in Indian Oil and a 4.8% stake in GAIL, data compiled by Bloomberg showed.

Bringing HPCL into its fold will make ONGC the nation’s third biggest refiner after Indian Oil Corp. and Reliance Industries Ltd. ONGC said it will pay 473.97 rupees a share for the purchase. The shares will be transferred directly to ONGC without being routed through the stock market, Shanker said.

“Overall we see the transaction valuation as fair, but don’t see major direct synergies," Credit Suisse analyst Badrinath Srinivasan wrote in a report Monday, adding that the acquisition will make ONGC’s earnings more stable.

ONGC shares on Monday rose as much as 6.4% to 206 rupees, the biggest intraday gain since August 2015. It pared gains to trade at 204.80 rupees as of 9:53 a.m. in Mumbai, while HPCL fell 2.5% to 405.80 rupees. The benchmark S&P BSE Sensex was 0.4% higher.

The company, which expects to close the deal by the end of January, may later consider merging its oil refining subsidiary Mangalore Refinery and Petrochemicals Ltd. with HPCL, Shanker said.

Merging MRPL will be positive for HPCL as it would help in combined crude sourcing and reduce logistics costs, Srinivasan of Credit Suisse said.

The transaction is exempt from the requirement to make an open offer and all regulatory approvals have been secured for the deal, ONGC said.

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