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It's not uncommon for merger and acquisition talks to fall through, for a variety of reasons -most commonly, a disagreement between prospective buyer and seller over valuation.
But it's rare for an M&A deal between an Indian and a foreign company to run into rough weather because of the political and diplomatic sensitivities of a third country, which otherwise has little to do with either company. (Till not long ago, companies that did business with Iran ran the risk of being blacklisted by the US, but mostly for trading.) But that's what appears to have happened with the months-long efforts of the Ruia brothers to sell Essar Oil, which has a turnover of almost Rs 1lakh crore, to the $92billion (Rs 6.16 lakh crore) Russian energy giant Rosneft.
Indications are that the deal has run afoul of the US Treasury's Office of Foreign Assets Control (OFAC), which last year issued a Crimea Sanctions Advisory and added Rosneft and its subsidiaries to its Sectoral Sanctions Identifications List in retaliation for the Vladimir Putinled Russian "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 Washington DC's foreign policy objectives.
Indian banks, which have lent about Rs 35,000 crore to Essar Oil (although the company claims its Rs 20,000 crore) and hold about 17% of the promoters' pledged shares, are wary of backing the deal for fear that their US operations might face action. "We may have to review our exposure to Essar Oil if Rosneft comes on board," said a top banker with a state-run lender. The London-headquartered Standard Chartered, which has an exposure of about $2.3 billion to Essar Global, the group's parent company , would almost certainly have similar concerns.
At the same time, any sign that Indian banks might be caving in to pressure from the US could set back India-Russia ties, especially at a time when New Delhi has been seeking to broaden its interests beyond the traditional defence buyer-supplier relationship, said diplomats familiar with the situation. India has invested over $5 billion in Russia's energy sector, through both established and exploration projects. The Essar-Rosneft deal was also intended to open up India's retail energy business to the world's largest listed oil company (by output).
In March, Essar Oil signed a non-binding agreement with Rosneft to sell 49% of its equity for about $3 billion; the deal was to have been closed by June. Responding to an email query about the fate of the deal, an Essar spokesperson said, "We would not like to comment on the matter." But a top-level manager with the group told TOI that talks were still on and the Ruias were still hopeful of closing the deal with Rosneft. However, he acknowledged that other options were also being explored.
With the deal in trouble, dealmakers at banks with large loan exposures to Essar have swung into crisis management mode and are said to be attempting to restart talks with Saudi Aramco and possibly the National Iranian Oil Co. "There's a feeling they may be a better fit at this point of time," a top banker told TOI on condition of anonymity .
Following the delisting of Essar Oil last December - in the run-up to the Rosneft deal - the Ruias own the entire company . They had original ly planned to sell 74%, but anticipating that transfer of majority control to a sanctioned company would run into OFAC hurdles, they came down to 49% to avoid being categorised as a subsidiary of Rosneft. But even that doesn't seem to have automatically cleared the path to a deal.
For the sale of the remaining 25% (74% minus 49%), the Ruias have been in talks with Singapore-based Trafigura Group - the world's second largest independent oil trader - which would leave the billionaire brothers Shashi and Ravi with 26%. But given Trafigura's close ties with Rosneft - it handles much of the crude exported by the Russians - the 25% sale is seen to be dependent on the Rosneft transaction going through, sources in the banking and energy industries said.
Rosneft's interest in the deal lies in Essar Oil's 405,000 barrel-a-day Vadinar refinery , its port and power plant, and 2,000 fuel stations. Rosneft already has an agreement to supply Vadinar refinery with 200,000 barrels of crude per day over 10 years.
Essar is still clinging to the hope that a share purchase agreement might be possible by early-September.The group, which is estimated to have a combined debt burden of Rs 90,000 crore, plans to utilise the funds raised from the share sale to pay back Standard Chartered and ICICI Bank, among others. Banks looking desperately to cut the debt on their books also have a lot riding on the Ruias finding a buyer.
What has added to the uncertainty is Rosneft's own financial situation, which analysts said was perhaps not as robust as originally believed - in part because the American sanctions have affected its own plans to sell some of its equity to western investors.
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