The national E&P company found BPCL too expensive as it evaluated the options of acquiring either HPCL or BPCL

State-owned Oil and Natural Gas Corporation (ONGC) is keen to acquire India's third-biggest fuel retailer Hindustan Petroleum Corporation Ltd (HPCL) in a Rs 42,254 crore deal after finding Bharat Petroleum Corporation Ltd (BPCL) too expensive to buy. Following up on Finance Minister ArunJaitley's Budget announcement of creating an integrated oil company, ONGC evaluated the options of acquiring either HPCL or BPCL — the two downstream oil refining and fuel marketing companies.

While acquiring either one of them made a lot of business sense, ONGC found the nation's second-biggest fuel retailer, BPCL, too expensive, sources privy to the development said. Bharat Petroleum Corporation Ltd has a market cap of Rs 1,01,738 crore and buying the government's 54.93 per cent would alone have entailed an outgo of Rs 55,885 crore.

So ONGC is in favour of acquiring HPCL, which has a market cap of Rs 54,797 crore and buying the government's entire 51.11 per cent stake would entail an outgo of Rs 28,006 crore. Another Rs 14,000 crore or so would be required in case an open offer has to be made.

Sources said that while initially the government was looking at creating an integrated oil company through the merger of an oil producer with a refiner, the idea was dropped for the fear of repeating of the Air India-Indian Airlines merger story.

Similar differences in work culture and ethos prevail in upstream and downstream firms and so the exercise under consideration now is to only help the government mop up resources and HPCL would become a mere subsidiary of ONGC.

ONGC already has a refining subsidiary in Mangalore Refinery and Petrochemcials Ltd (MPRL). Sources said that an open offer to buy another 26 per cent stake from other shareholders of HPCL would at current prices cost ONGC another Rs 14,247 crore.

As per the Security and Exchange Board of India's (Sebi) takeover code, if a company acquires more than 25 per cent in another listed company, it has to make an open offer to buy at least 26 per cent more in the target firm. Some reports have suggested that Oil and Natural Gas Corporation buying the government stake in HPCL may not trigger an open-offer rule, as the government's holding is being transferred to another state-run firm and the ownership is not going to change.

But sources pointed out that way back in February 2002, state-owned Indian Oil Corporation (IOC) had acquired the government's 33.58 per cent stake in fuel retailer IBP Co Ltd for Rs 1,153.68 crore and had to make an open offer for additional shares. Both IOC and IBP were government owned companies.

Sources said that the oil ministry and Oil and Natural Gas Corporation may try and seek exemption from the open offer to keep the acquisition cost low. Oil and Natural Gas Corporation has cash reserves of Rs 13,014 crore and will have to borrow at least Rs 18,000 crore to fund the government stake acquisition in HPCL, they said.

If the open offer is made, additional borrowings would have to be done. There are only six major companies in the oil sector — Oil and Natural Gas Corporation and Oil India Ltd (OIL) are oil producers, Indian Oil Corporation, Hindustan Petroleum Corporation Ltd and Bharat Petroleum Corporation Ltd are in the refinery business and GAIL (India) Ltd is in the midstream gas transportation business.

The rest such as ONGC Videsh, Chennai Petroleum Corp (CPCL), Numaligarh Refinery Ltd and MRPL are already subsidiaries of one of these six PSUs. Sources said that the options were very limited and ONGC chose HPCL over BPCL. HPCL will add 23.8 million tonnes of annual oil refining capacity to ONGC's portfolio, making it the third-largest refiner in the country after IOC and Reliance Industries.

ONGC is already the majority owner of MRPL, which has a 15- million tonne refinery. Sources said that ONGC buying HPCL would require two sets of Cabinet approvals — one where the government approves the sale of its all or part of its 51.11 per cent stake to ONGC and the other for allowing ONGC to spend the money on a stake buy.