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Oil and Natural Gas Corp (ONGC) will soon seek shareholders’ approval to raise a debt of Rs 25,000 crore to fund the planned acquisition of Hindustan Petroleum Corp (HPCL).
The board of ONGC has approved raising the debt and would now take the proposal to shareholders. “This is a blanket approval. We have kept all options open from bank loan to issue of domestic or overseas bonds,” a senior executive at ONGC said. ONGC would need Rs 37,750 crore to pay for government’s 51.1% stake in HPCL at current market prices.
ONGC plans to use a mix of internal resources and debt to fund the deal. It has a cash reserve of about Rs 13,000 crore. This would be ONGC’s maiden borrowing in more than a decade. The company has mostly depended on its pile of cash to fund its capex. It has, however, stood guarantor when its units borrowed.
“A decision on how we fund the deal would depend on valuation of HPCL stake. We would evaluate all options from taking bridge loan from domestic and foreign banks or issue bonds in India or overseas and will go for a mix that works best for us,” the executive said. The company wouldn’t immediately sell stake in Indian Oil Corp or GAIL to fund the deal, the executive said. “We may look at selling stake in IOC to replace debt later. But we are not selling immediately,” he said.
ONGC executives said the company expected HPCL deal to go through without the necessity of making an open offer or paying government a premium over currently traded prices. “HPCL shares are fairly valued today. The current prices already include a premium since the stock has run up so much in a year,” another ONGC executive said. HPCL shares are up 83% in a year. The finance and oil ministries have separately sought advisers for the deal. ONGC too is in the process of appointing advisers.
Last month, the Cabinet gave an inprinciple approval to sell the government’s entire 51.11% stake in HPCL to ONGC in a bid to create a state-run integrated oil major that can compete with private and foreign players. By turning HPCL into its subsidiary, ONGC, which produces 60% of country’s crude oil, will also become the nation’s third-largest refiner with control over 40 million tonnes per annum of refining capacity.
ONGC already controls a 15 million tonnes refinery through its unit, MRPL. The deal would also give ONGC control over HPCL’s 14,500 filling stations, or about a quarter of country’s petrol pumps.
ET View: Cut Funding Costs
Prudent economising on funding costs would make perfect sense. ONGC has large holdings of IOC stock. The equity stake can well be leveraged to reduce and rationalise borrowing costs. Unlocking shareholder value is also worth considering. It may make sense to list ONGC Videsh, a wholly-owned subsidiary of ONGC. Further, borrowing abroad could be sensible as well, so as to take advantage of lower cost of funds.
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