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In the largest inflow of foreign direct investment, Russia’s state-controlled oil giant Rosneft and its partners on Saturday took over India’s second biggest private oil firm Essar Oil in an all-cash deal valued at about USD 13 billion. Rosneft bought a 49 per cent stake in Essar Oil’s refinery, port and petrol pumps, while Netherlands-based Trafigura Group Pte, one of the world’s biggest commodity trading companies, and Russian investment fund United Capital Partners split another 49 per cent equity equally. The remaining 2 per cent will be held by minority shareholders after delisting of Essar Oil.
The deal has an enterprise value of close to USD 12.9 billion – USD 10.9 billion being for a 20 million tons a year refinery in Gujarat and over 2,700 petrol pumps and another USD 2 billion for Vadinar port in Gujarat. The deal factors in Essar Oil’s debt of about USD 4.5 billion and about USD 2 billion debt with the port company.
Also, the near USD 3 billion dues to Iran for past oil purchases will continue to be on Essar Oil books. Trafigura, which has been funded by Russian bank, may sell its stake to Rosneft at a later date.
“We would be utilising significant portion of the deal proceeds in debt reduction. Group debt will reduce by about 50 per cent,” said Prashant Ruia, Director, Essar Group.
Essar Group, one of India’s largest and most indebted conglomerates, would trim its about Rs 88,000 crore (over USD 13 billion) debt by half and ward off creditor pressure.
The 49 per cent stake Trafigura and UCP are picking will be split between the two in 49:49 ratio while Essar Group will hold the remaining 2 per cent.
Ruia said the equity value of the deal is “on or about Essar Oil’s delisting price of USD 5.8 billion”.
Of the USD 12.9 billion value, USD 6.5 billion is for the debt with Essar Oil and port company. Another USD 0.5 billion is for working capital, leaving USD 5.9 of equity value which is equal to the delisting price of Essar Oil.
Ruia said as per SEBI order the shareholders of Essar Oil will be paid if the final equity value of the deal with Rosneft is higher than the delisting price. “We will get to know of that when the deal closes in first quarter of 2017,” he said.
The acquisition is the biggest in India and largest outbound deal for Russia. The all cash deal is expected to close in first quarter of 2017.
The deal was announced as Prime Minister Narendra Modi met Russian President Vladimir Putin during a meeting here of the leaders of the BRICS countries (Brazil, Russia, India, China and South Africa).
Ruia said Rosneft will continue to use Essar brand for the retail operations. “We have signed a branding agreement under which retail outlets will continue to use Essar brand because it is a very strong brand.”
“We are not exiting oil and gas business. We continue to own and operate the Stanlow refinery in UK which is a 12 million tons refinery and has 12-13 per cent market share. Also, the upstream exploration and production business is not part of the deal,” he said.
He said two agreements were signed on Saturday for the sale. “The first sale and purchase agreement envisages the sale of 49 per cent to Petrol Complex Pte Ltd (a subsidiary of PJSC Rosneft Oil Company); the second envisages the sale of the remaining 49 per cent to Kesani Enterprises Company Limited (owned by a consortium led by Trafigura and United Capital Partners) at an enterprise valuation of Rs 72,800 crore (USD 10.9 billion).
“An additional Rs 13,300 crore (USD 2 billion) will be paid for the acquisition of Vadinar Port, which has world-class storage and import/export facilities,” Ruia said.
As per the deal, Essar Energy Holdings Ltd and Oil Bidco (Mauritius) Ltd — which control Essar Oil signed separate agreements for the 98 per cent stake sale.
Russia’s VTB Bank PJSC will lend Essar USD 3.9 billion to restructure debt, said Andrey Kostin, VTB CEO. Rosneft itself will pay about USD 3.5 billion for the Essar deal, Ruia said.
“We plan to utilise proceeds from the stake sale to deleverage the Group and pave the way for strategic consolidation and growth in other businesses,” Ruia said.
Essar Oil, part of a steel-to-ports conglomerate controlled by the billionaire Ruia brothers, operates a 405,000-barrels-a-day refinery at Vadinar in Gujarat. The refining complex also has a captive power plant as well as a port and terminal facilities.
The deal is the single largest foreign investment in the Indian refining sector and will strengthen the ties between the world’s largest oil producer and the world’s fastest growing fuel consumer.
“The all-cash deal encompasses Essar Oil’s 20 million tonne refinery in Gujarat and its pan-India retail outlets,” Ruia said.
The deal includes the refinery as well as the Vadinar port and more than 2,700 retail gas stations. The initial transaction will not include a power plant serving the refinery, which could be transferred later after getting necessary approvals.
“The closing of the transaction is conditional upon receiving requisite regulatory approvals and other customary conditions. We expect to obtain the relevant approvals before the end of this year,” Ruia said.
While the refining sector is delicensed with 100 per FDI allowed, the deal will not as such need any major regulatory approval in India. It will only need an approval by the Competition Commission of India.
The 20 million tonne oil refinery in Vadinar accounts for 9 per cent of India’s total refining output and is supported by a 1,010 MW captive power plant, Ruia said.
“The additional Rs 13,300 crore that the new stakeholders have agreed to pay is for the 58 million tonne deep draft port in Vadinar that helps in importing crude and exporting finished products,” he said.
Initially, Ruias wanted to shed only 49 per cent in favour of Rosneft but the USD 3.2 billion they would have got from the Russian company wasn’t enough to pay off the USD 4.5 billion debt on the company’s books.
A larger 74 per cent stake was offered to Rosneft but that idea was dropped as the Russian company faces US sanctions and by a virtue of its majority stake Essar Oil too would have come on that list.
At this stage, Trafigura was roped in and offered 24 per cent stake. Trafigura, which has close ties to Rosneft, was to finance its acquisition by taking loan from Russia’s VTB Capital, part of state-controlled bank VTB.
The deal includes the Vadinar refinery as well as the Vadinar port and more than 2,700 petrol pumps. A power plant serving the refinery as well as company’s coal-bed methane? (CBM) blocks are not included in the deal.
As part of the deal, Rosneft-Trafigura will also take over the debt of Essar Oil and the port and terminal company.
Ruia said VTB Capital has played a major role in the transaction, which has been structured in such a way that it does not invite US sanctions on Essar Oil.
Last year, US Treasury’s Office of Foreign Assets Control (OFAC) had issued a Crimea Sanctions Advisory, adding Rosneft and its subsidiaries to its Sectoral Sanctions Identifications List in retaliation for the Russian’s invasion of eastern Ukraine.
Entities on this list are subject to economic and trade sanctions on grounds that they pose a risk to US national security and are in violation of US foreign policy objectives.
Rosneft had in July last year signed a non-binding agreement to buy a 49 per cent stake in Essar Oil. This was followed by December 2015 deal wherein Rosneft was to supply Vadinar refinery with 200,000 barrels of crude per day (10 million tons a year) for 10 years.
Sources said Trafigura may at a later stage transfer its stake to Rosneft.
Trafigura handles most of the crude exported by Rosneft. This has propelled Trafigura to being the world’s second-biggest independent oil trader, handling more than 4 million barrels a day.
Russia is seeking to expand its energy ties in Asia amid tensions with the West sparked by Moscow’s annexation of Crimea in 2014.
Rosneft, the world’s largest listed oil producer by output, is looking at south Asia for downstream investments as it sees the region as becoming a fast-growing market for its oil.
India — which depends on imports for about 80 per cent of its needs — is set to taking over from China as the main driver of global oil demand growth this year. India is the world’s third-largest oil consumer, behind China and the US.
Rosneft is reportedly discussing investing USD 13 billion in a new refinery project in Indonesia with Pertamina, the country’s state-controlled oil and gas company.
Russian oil producers have been relatively sheltered from the collapse in crude prices by the decline of the rouble, which has helped them to reduce costs. A progressive taxation system under which the Russian government has absorbed most of the decline in oil prices has also boosted the producers.
Russia has signed huge deals to deliver oil and gas to China and allowed Chinese companies to buy stakes in large energy projects.
Indian companies have also snapped up stakes in production assets in Siberian fields. ONGC, Oil India and Indian Oil are investing USD 5.5 billion to buy stakes in Rosneft’s Vankor and Taas-Yuryakh fields.
Chinese and Indian state firms have expressed an interest in taking a stake in Rosneft, as the Russian state plans to sell 19.5 per cent of the company this year. The state would retain control of the company, in which BP of UK already has a near 20 per cent stake.
Russia ranked 20th among countries with a total investment of just about USD 1.2 billion in India in the last 16 years. Mauritius gave nearly USD 96 billion, while Singapore and the UK have invested USD 46 billion and USD 23 billion each in India.
Oil sector attracted about USD 6.68 billion in foreign investment.
Commenting on the the Essar-Rosneft deal, ICICI Bank MD & CEO Chanda Kochhar said: “This deal is the largest ever foreign acquisition in India. It proves the attractiveness of the Indian energy market to foreign investors as India is one of the fastest growing fuel consuming economies in the world.”
She further said: “This deal is also a significant step in the process of deleveraging the balance sheets of Indian corporates. ICICI Bank has been closely working with various companies including the Essar Group to help them deleverage their stressed balance sheets. We will continue working towards this objective with others.”