The Essar Group has decided to sell 73 per cent stake in Essar Oil to help the parent conglomerate almost halve group debt that currently stands at more than Rs.100,000 crore.
The promoters have signed an agreement to sell 49 per cent stake in the company to OAO Rosneft, Russia’s largest energy company. In addition, the promoter group is in advanced talks with global oil traders such as Trafigura, Vitol Group, Mercuria Energy Group and Glencore Plc. to sell the other 24 per cent, according to Prashant Ruia, Essar Group CEO.
Essar Oil’s major assets include the Vadinar Refinery, captive power plants and the 2,400 retail outlets that vend fuel.
The financial structure of the deal, as well as the reconstitution of the board, are being worked out, it is learnt. The entire deal will value Essar Oil at $ 10 billion (or about Rs 67,000 crore), according to Mr. Ruia.
Deal by October “The deal with Rosneft will be completed by October,” Mr. Ruia told The Hindu. “The entire proceeds of Rs.45,000 – Rs.50,000 crore will go towards repaying debt and deleveraging our balance sheet.”
The sale, that could become one of the largest in Indian corporate history, would help the promoters to almost halve the interest liability from the Rs.10,000 crore, thus generating savings of about Rs.5,000 crore on interest costs alone, he said. Currently, Essar Oil and Essar Steel have debts amounting to about Rs.23,500 crore and about Rs.33,800 crore, respectively.
Essar Group had sold the one-third stake it held in Hutchison Essar to Vodafone for $5 billion in 2007 and since then it has invested aggressively in doubling its refining, steel, power and ports capacity.
“About 5-6 years ago, the then Prime Minister, Mr. Manmohan Singh called a meeting of industry leaders and asked us to invest in India’s growth story as GDP was growing at 8 per cent,” Mr. Ruia said. “We had two options with the $5 billion we received from Vodafone, one was to pay our debts and become a zero-debt company and another was to invest in our business. We chose the second one and now our refining capacity has more than doubled to 20 MTPA, with capacity in steel touching 10 mtpa and while our power capacity is at 5,000 MW.”
Global slowdown After these investments were made, the global economy witnessed a slowdown, regulatory approvals especially those in the context of the environment, became difficult and the coal blocks were cancelled leading to most of the projects being stalled at different levels, thus resulting in under-utlisation of capacity, he said.
“If I have taken a loan for 10 mtpa steel plant, and the plant is operating at just 3 mtpa capacity due to oversupply by the Chinese, is it my fault? We continue to service the loan for entire 10 mtpa plant. That’s the problem area,” said Mr. Ruia.
This time around, Mr. Ruia said he has decided to retire debts from the sale proceeds instead of investing the money in expanding facilities.
The group has taken a conscious decision not to sell stakes in other businesses such as steel, power and ports as envisaged earlier because growth has returned in these core sectors after the government’s push for infrastructure projects, he said.
Restructure debt “Now, we are operating our steel plant at 70 per cent capacity from 30 per cent earlier and it will be operating at 85 per cent capacity by the end of this year. Similarly, our power plants have turned profitable,” said Mr. Ruia.
Asked about the commitment that promoters show, industry-wide, to paying back loans, Mr. Ruia said, “We have to invest at least 25-30 per cent as equity in the business and pay interest on the remaining 70 per cent (that comes from) debt. While the bankers continue to get interest, it’s the promoter, who takes a hit by writing off the equity part when the project does not give any returns and bankers get most of their money back.” The group is planning to restructure the remaining portion of the debt under RBI’s S4A scheme, which will help the company further reduce its interest liability.
