With government mounting pressure on defaulting firms to sell their profitable assets to reduce their debts, Rs. 86000 crore acquisition of Essar Oil, India's second biggest private oil firm, by Russian giant Rosneft will salvage 10 per cent of the non-performing assets (NPAs) of the banking system, analysts and bankers said.
The Rs 85,000-crore transaction will release Rs 45,000 crore of cash for the Essar group, which can be potentially used to repay debt of Rs 23,500 crore in Essar Global Holdings and reduce debt in stressed entities such as Essar Steel and Essar Power, Kotak Institutional Equities said in a report.
The note says the deal is significant for the Indian banking sector. “The formal announcement of the deal in the recent BRICS summit … suggests a high degree of involvement of the Indian government in the transaction. We note that Indian PSU oil firms had earlier purchased a 49.9 per cent stake in Rosneft’s Vankor block. Indian banks have become very forceful in addressing the problem of bad loans. Indian promoters may have little option but to sell profitable assets to reduce debt; this has been the case for the past two years,” the Kotak report said.
It added that Indian banks have become forceful in addressing the problem of bad loans and Indian promoters may have little option but to sell profitable assets to reduce debt and this has been the case for the past two years.
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 is held by minority shareholders after delisting of Essar Oil.
The deal has an enterprise value of close to $13 billion, which includes Essar Oil's debt of $4.5 billion and about $2 billion debt with the port company and power plant. Also, the near $3 billion dues to Iran for past oil purchases will continue to be on Essar Oil books.
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.
Essar Oil said it has signed two agreements for the sale.
"The first sale and purchase agreement envisages the sale of 49% 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 ($10.9 billion).
"An additional Rs 13,300 crore ($2 billion) will be paid for the acquisition of Vadinar Port, which has world-class storage and import/export facilities," it said
The deal would help the Essar Group, one of India's largest and most indebted conglomerates, trim its about Rs 88,000 crore (over $13 billion) debt and ward off creditor pressure.
The deal was announced as Indian Prime Minister Narendra Modi met Russian President Vladimir Putin during a meeting of the leaders of the BRICS countries here.
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 acquisition is the biggest foreign acquisition ever in India and Russia's largest outbound deal.
The all cash deal is expected to close in first quarter of 2017.