ONGC may not be required to pay premium for government stake in HPCL

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Source: The Economic Times
Monday, July 17, 2017

 NEW DELHI: Oil and Natural gas Corp (ONGC) need not pay a premium for government stake in Hindustan Petroleum (HPCL) since the latter is widely traded and fairy valued by the market and the transaction would involve no change in state control over the two companies, a senior executive at ONGCB said. 

The government is planning to sell its entire 51.11% stake in the HPCL to ONGC, according to people familiar with the matter but hasn’t yet officially communicated its decision to companies. 

Stock markets are concerned about the price ONGC may have to pay for acquiring the refiner. The transaction would also influence the status of Mangalore Refinery and Petrochemical (MRPL), jointly promoted by ONGC and HPCL, the executive said. “After ONGC takes over HPCL, MRPL will be managed by HPCL. There is no logic for ONGC to have two companies in the same segment,” said the ONGC executive. “HPCL is rightly placed to handle MRPL since both operate refineries.” ONGC and HPCL own 71.63% and 16.96% respectively in MRPL, while the balance 11.42% is owned by the public. 

HPCL has in recent days pitched for taking control of MRPL. The terms of the ONGC-HPCL deal are still being finalised but speculations abound, including on how much premium ONGC may have to pay the government for HPCL shares. 

“HPCL is already fairly valued by the market. It has a very high free float and is very actively traded. In such a scenario, the question of premium just doesn’t arise,” the executive said. “Moreover, the point of control premium is not valid since the control of both companies would rest with the government after the transaction, as it does now,” he said. Of the public shareholding of 48.89% in HPCL, stateowned Life Insurance Corp owns just about 2% while the balance stake is owned by numerous foreign and domestic institutions and retail investors. 

To buttress his argument, the ONGC executive cited the sale of 10% stake in Indian Oil Corp in March 2014, when the government sold shares at 10% discount to then prevailing market market price. Under its divestment programme, the government had then sold 5% stake each to ONGC and Oil India. 

The speculation about HPCL shares likely to be sold at a premium has sent stock up 16% in ten days. The stock is up 63% in a year. 

Paying a premium can drain away ONGC’s resources already needed for its planned capex of Rs 30,000 crore in 2017-18. The company has just about $2.5 billion of cash reserve, half of which would go into paying for the acquisition of KG Basin asset of GSPC. Acquisition of government’s 51.11% stake in HPCL would require ONGC to pay $4.7 billion at current market prices. 


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