India Approves Creating State Oil Giant in $4.6 Billion Deal

India approved the sale of a stake in state-run refiner Hindustan Petroleum Corp. to the country’s biggest oil and gas explorer, according to a person with knowledge of the decision.

The move fulfills a plan, first outlined in February, to create an Indian oil giant through consolidation and mergers, forming a company comparable with international rivals that could weather crude-price volatility. Bringing HPCL into its fold will make Oil & Natural Gas Corp. the nation’s No. 3 refiner after Indian Oil Corp. and Reliance Industries Ltd. The stake is valued at about 299 billion rupees ($4.6 billion), based on Wednesday’s closing stock price.

“This deal will make both ONGC and HPCL stronger as the benefits of synergy are huge,” ONGC Chairman Dinesh Kumar Sarraf said in a phone interview on Wednesday. “It will add value to shareholders of both companies.”

The cabinet backed the plan to sell the government’s 51.1 percent holding in HPCL to ONGC, the person told reporters, asking not to be identified because the information isn’t public. The deal value is more than 40 percent of the 725 billion-rupee target of India’s asset-disposal plan for the fiscal year to March 2018. Prime Minister Narendra Modi’s administration received 462.47 billion rupees from divestments last fiscal year, exceeding its goal.

The HPCL stake sale is unlikely to trigger an open offer as the government’s holding is being transferred to another state-run firm. Under India’s takeover code, if a company acquires more than 25 percent of another listed entity, it has to make an open offer to buy at least 26 percent more.

Negative Reaction

The immediate reaction of these developments could be negative for HPCL, especially if its minority shareholders aren’t given an open offer, Citi Research analysts Saurabh Handa and Sohini Banerjee said in a report Thursday. For ONGC, acquiring a downstream asset like HPCL should be positive for its business mix, they said.

HPCL shares fell as much as 5.2 percent in Mumbai, the most in a month, to 363.80 rupees and traded at 373.60 rupees as of 11:13 a.m. ONGC shares gained nearly 3 percent to 167.85 rupees.

ONGC is running low on funds as it has raised spending amid a decline in costs for exploration services and equipment. The acquisition may threaten some of its near-term investments including a plan to revive a long-delayed project aimed at cutting the nation’s energy imports.

Why India is creating an oil and gas giant – a QuickTake explainer

Apart from a proposed $4.5 billion investment in its oil and gas blocks this financial year, ONGC plans to spend a further $1.2 billion to acquire Gujarat State Petroleum Corp.’s stake in a block off India’s east coast.

The company had surplus cash of 130.14 billion rupees as of March 31, down from 246.9 billion rupees a year earlier, according to an exchange filing.

“We have chalked out a funding plan and that would include a portion of debt as well,” Sarraf said, without giving details. He also said that the deal won’t affect any other ONGC investments.

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