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Oil giant in the making ONGC may ink one of the biggest PSU M&As in 2017-18 to buy HPCL

Among various permutations and combinations being weighed, sources said ONGC could buy out the government’s 51.11 per cent holding in HPCL by paying partly in cash and partly by allocating additional shares in the oil explorer. In one of the biggest public-sector merger and acquisitions (M&As) in recent times, country’s largest oil explorer ONGC may acquire oil marketing firm HPCL in 2017-18 under an arrangement that may involve payments in cash plus equity or bonds.

Among various permutations and combinations being weighed, sources said ONGC could buy out the government’s 51.11 per cent holding in HPCL by paying partly in cash and partly by allocating additional shares in the oil explorer. Alternatively, ONGC may issue bonds to the government in lieu of its stake in HPCL, which would be encashed by the Centre later.

The M&A could be carried out in such a manner that optimally benefits the government and other shareholders, sources said, adding that talks on possible merger of the two companies are at a preliminary stage. Analysts believe the merger would create synergy in oil exploration, refinery and retail businesses capabilities of the two state-run firms.

The 2017-18 Budget has floated the idea of creating an integrated oil major through mergers to make a globally competitive public sector player. Even though market capitalisation may not correctly reflect the valuation of a company, still going by that, the government stake in HPCL could command around Rs 26,800 crore. The oil explorer could make an open offer later to buy additional around 26 per cent from public shareholders, possibly costing nearly Rs 13,600 crore, going by the current market price. Consent of at least 75 per cent shareholders is required to approve a merger.

Going by the latest share price, HPCL’s market capitalisation is around Rs 52,400 crore as on March 9, 2017 (BSE).

An HPCL executive said the company will not offer any comment on the issue. An ONGC executive said if such a deal at all happens, it will not be just based on the market cap but will take into consideration various other business factors.

“There are various possible structures for the deal. Payments could be made through issuing bonds, cash or equity. However, it will be a complicated process since HPCL is not a very small company and ONGC may have to raise funds. It may also go for FPO,” said Anish De, partner, infrastructure and government services, KPMG in India.

ONGC, the country’s largest PSU oil explorer, had a cash and bank balance of about Rs 13,000 crore as on June 30, 2016. Its reserves and surplus was at Rs 1,47,574 crore at March-end, 2016, the highest among all public-sector companies. The PSU oil major had the highest market capitalisation at Rs 2,48,194.76 crore (BSE) as on February 28, 2017. The government owns 68.93 per cent in ONGC.

Commenting on the possible merger of ONGC and HPCL, Oil minister Dharmendra Pradhan recently told a television channel that the two competent companies are in talks and are hiring consultants to chalk out a feasible plan. He did not name any company.

According to Vivek Jain, associate director, India Ratings and Research, the proposed M&A deal will either be a cash plus equity or share swap at a pre-agreed price. The ONGC-HPCL deal, if goes through, could boost government’s disinvestment revenue. The Centre has set an ambitious disinvestment revenue target of Rs 72,500 crore in 2017-18, 60 per cent higher than revised estimate of Rs 45,500 crore in 2016-17.

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