ONGC-HPCL deal: Is the deal fair for HPCL shareholders?

Key Highlights:

• Union Cabinet approved HPCL's 51% stake sale to ONGC
• 40% of government's stake sale target for FY18 achieved if the deal is valued at Rs 30,000 crore
• Analysts believe that this deal is not a fair deal for retail shareholders of HPCL.

Union Cabinet on Wednesday announced 51% stake sale in Hindustan Petroleum Corporation Ltd (HPCL) to Oil & Natural Gas Corporation Ltd (ONGC). 

Post ONGC buying the government stake, HPCL will become subsidiary of India's largest oil producer with its board continuing to function like before.

On Thursday, shares of ONGC gained while of HPCL dropped. 

At 1400 hours, the shares of ONGC were trading at Rs 166.15 per piece, up 1.90% or  Rs 3.10. While HPCL shares were trading at Rs 368.30 per piece, down 4.09% or Rs 15.70 on BSE. 

While both the parties have not yet mentioned the exact amount of the deal, according to a PTI report, the government will fetch around Rs 26,000 crore to Rs 30,000 crore from this stake sale. 

Disinvestment plan on track?

Finance Minister Arun Jaitley while presenting Annual Budget in February, 2017 had said about "creating an integrated oil behemoth". 

For FY18, the government has set a target of raising Rs 72,500 crore, and the reports suggest ONGC-HPCL will earn Rs 30,000 crore for the government. Which clearly means, more than 40% of the target is met with just one deal.

According to a PTI report, ONGC has cash reserves of Rs 13,014 crore and to fund the government stake acquisition in HPCL, it will have to borrow at least Rs 10,000 crore.

On one side, BPCL has a market cap of Rs 1,01,860.56 crore and buying government's 54.93% would alone have entailed an outgo of about 56,000 crore. While, HPCL has a market cap of Rs 58,485.55 crore and buying government's entire 51.11% stake would entail an outgo of Rs 29,900 crore.

Is it a fair deal for HPCL?

Analysts believe that this deal is not a fair deal for retail shareholders of HPCL. 

The actual acquisition price will be decided between the government and ONGC, but the deal is expected to be completed in the next one year. 

ONGC Chairman DK Sarraf has stated that he believes that an open offer will not be required and therefore, the deal may not result into any benefit to minority shareholders of HPCL.

As part of the transaction, HPCL may acquire Mangalore Refinery and Petrochemicals Limited (MRPL) in which ONGC currently owns 72%. 

JM Financial in its report explains, ONGC would need  Rs 29, 800 crore to acquire 51% in HPCL
(based on CMP). We note that ONGC has 13% investment in IOC (valued at Rs 25,00 crore) and 72% in MRPL (valued at Rs 16,400 crore) while HPCL has 18% stake in MRPL. 

Since it does not make strategic sense to hold investment in IOC and control in HPCL, ONGC may be tempted to sell IOC shares for funding the acquisition. Similarly, ONGC can raise part funding to acquire HPCL through selling MRPL shares to HPCL. 

Mehul Thanawala, Analyst at JM Financial said HPCL shareholders would not stand to gain much from the merger given that there may not be an open offer.

Kotak Mahindra Bank's research wing in in its report said, "We highlight that HPCL’s minorities will not gain anything from this transaction, irrespective of the price, if the government chooses to avoid an open offer; in our view, the government may have to seek an exemption from SEBI, if the transaction is executed at a price, 25% above 60-days volume weighted average price (VWAP) price of HPCL."

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