Mumbai: The Essar Group will raise $2.5 billion (Rs11,175 crore) by selling shares of Essar Energy Holdings Ltd, a holding company for the group’s energy businesses, and list it on the London Stock Exchange (LSE).
The money raised from the offering to overseas institutional investors will be used to fund power projects, exploration and development of oil and gas blocks, expand Essar’s refinery, and to meet working capital requirements, the group said on Thursday. Essar Energy owns all of unlisted Essar Power Ltd and 89% of listed Essar Oil Ltd.
The Ruias of the Essar Group began their business by building an outer breakwater in Chennai port in the 1970s and rose to become a steel-to-shipping conglomerate. The LSE listing will follow that of Vedanta Resources Plc, the holding company of Anil Agarwal’s non-metal business, which raised nearly $1 billion in 2003.
“The listing offers a unique opportunity for institutional investors to participate in the India growth story and allows us to list our shares in an international market,” Essar Group chief executive Prashant Ruia told Mint. According to him, Essar Energy Holdings is valued at $10 billion.
“We (the promoters) had invested nearly $2 billion to build 6,000MW of power plants and a 12 million tonne (mt) refinery in Jamnagar,” Ruia said.
According to a study released in November 2009 by the Confederation of Indian Industry and AT Kearney, about $250 billion will need to be invested in the power sector over the next eight-nine years. AT Kearney also said India’s significant power deficit (11% in 2009) is expected to continue.
India’s per capita power consumption of 610 kWh in 2007 was far below the per capita power consumption in other major emerging markets—2,346 kWh in China, 2,154 kWh in Brazil and 6,338 kWh in Russia, according to the International Energy Agency. The World Bank says 44% of Indian households do not currently have access to electricity.
“The listing will allow them to have better access to capital and to move to the next level,” said a fund manager, who works for a British investor in India. He did not want to be identified as he is not authorized to speak to the media. It would also be a vote of confidence in the group “after Essar Steel Ltd failed to repay floating rate notes (FRN) to foreign investors in 1999”.
Ruia said the FRN issue took place 11 years ago, and added, “We have grown 10 times bigger since then.”
Essar Oil, which has built a 12 mt refinery, is about to end a corporate debt restructuring (CDR) programme. “We are in the process of exiting the CDR,” Ruia said.
JPMorgan Cazenove and Deutsche Bank AG are the bankers to the plan.
An LSE listing will give the group international branding, the currency to look at global opportunities for acquisition and a new investor base, said Rajagopal A., managing director and head of global capital markets (India) at UBS Securities India Pvt. Ltd.
The Essar Group has been buying steel firms in Canada and Indonesia, mines in Indonesia, apart from telecom firms, oil exploration blocks and refineries in Africa in the last few years on the back of a put option clause attached to its 33% stake in Vodafone Essar Ltd, India’s third largest cellphone company.
The promoters have the right to sell a 33% stake to Vodafone by May 2011, benchmarked to a valuation of $3.5 billion. The group has raised nearly $3.5 billion between 2005 and 2009 by offering this stake as collateral.
“The LSE listing is strategically good for the Essar Group as it is going for huge international expansion,” Khandwala Securities Ltd’s research analyst Vinay Nair told Mint. “It will give them a good hold on external fund-raising capabilities and a listing will have a positive effect on the group’s credibility.”
Nair pointed out that there would be no change in the fundamentals. “The refining margins are not encouraging, but with the LSE listing, the Essar Group will broaden its horizon,” he said.
On the completion of the offer, it is expected that Essar Energy will be considered for inclusion in the FTSE 100 Index, an Essar Group media statement said. FTSE is an independent company jointly owned by the Financial Times and LSE.
This issue of fresh shares will result in a 20-25% stake dilution for the promoters, while the group has clarified that it will retain a minimum of 75% of Essar Energy’s issued share capital. Essar Energy is incorporated in the UK, and has its registered office in London and head office in Mauritius.
Ruia said Essar Energy will continue to operate its oil and gas business through Essar Oil, which will remain listed on the Bombay Stock Exchange and the National Stock Exchange. Essar Oil currently has a public float of 11.42%. “We have no plans to delist any of our companies,” he said.
The Essar Group delisted Essar Steel in 2007 and attempted to delist Essar Shipping Ltd in the same year.