Mumbai/Ahmedabad: Ruia’s promoted Essar Oil on Saturday sealed a deal with Russia’s Rosneft, United Capital Partners and Trafigura Group Pte. to sell 98% in its most priced asset, the 20 million tonnes per annum Vadinar refinery and Vadinar Port in Gujarat.
An all-cash deal, the transaction includes Rs.72,800 crore ($10.9 billion) for Essar Oil’s refining and retail assets, and Rs.13,300 crore ($2 billion) for Vadinar port and related infrastructure.
According to one of the sources directly involved in the deal, “the total equity value of the deal stands at about $6.4 billion and $6.6 billion as debt approximately.”
The deal was signed at the Brics (Brazil, Russia, India, China, South Africa) summit in Goa in the presence of Prime Minister Narendra Modi and Russian President Vladimir Putin.
The funds realised through the deal will be used to settle Essar Group debt, said Prashant Ruia, director, Essar Group at the press meet held in Goa.
The Group has a debt of about Rs.80,000 crore that it accumulated in a bid to expand operations and buy steel and oil assets overseas.
“We will be utilising significant portion of this for debt reduction,” Ruia told reporters in Goa. The deal had been in the works since July 2015.
Rosneft is world’s largest publicly listed company and will take 49% stake in Essar Oil. Netherlands-based Trafigura Group Pte., one of the world’s biggest commodity trading companies, and United Capital Partners (UCP), a Russian investment fund, will together hold the rest 49% between them.
In July, Mint reported that Essar Oil is in talks with oil trading companies including Trafigura Group to sell stake in the company.
“Investing in EOL, which operates one of the world’s most complex refineries and runs India’s largest private sector retail network, gives the new stakeholders a strong foothold in the Indian market that will witness robust demand growth for petroleum products in the long term. The growth for refined petroleum products in the Indian market for the next five years is expected to be in the 5%-7% range,” Essar Oil said in a statement.
Vadinar Refinery is India’s second largest refinery contributing 9% of India’s refining output. Essar Oil also operates a pan-India network of 2,700 retail outlets.
“The closing of the transaction is conditional upon receiving requisite regulatory approvals and other customary conditions. The parties expect to obtain the relevant approvals before the end of the first quarter of 2017,” Essar Oil said in a press statement.
India allows 100% foreign direct investment in the oil and gas sector.
Once the Rosneft deal is officially closed, Essar Oil’s refinery at Vadinar in Gujarat is likely to begin receiving crude oil from Rosneft. Last July, Essar Oil signed an agreement with Rosneft for supply of 10 million tonnes of crude per annum to the Vadinar refinery in Gujarat for 10 years.
This August, Essar Oil had said that it will invest an additional Rs.1,200 crore over the next two-to-three years to upgrade its Vadinar refinery in Gujarat to boost refinery margins by $1.5 per barrel. The company, had also said that it is weighing the option of reviving its petrochemical complex project with an investment of around $1-1.5 billion.
The company has already earmarked and acquired land, around 5km away from the refinery, to develop a petrochemical complex that would produce gasoline, liquefied petroleum gas (LPG) and propylene among other products.
Essar Oil which runs a network of 2,700 operating retail outlets, has 2,850 additional outlets in various stages of implementation. Essar Oil has a target of reaching 4,300 operational outlets by the end of FY 2016-17. The total capital investment in these outlets would be about Rs.2,100 crore, which will be mostly infused by franchisees.
Arpwood Capital acted as sole advisors to Essar on the transaction.
“India, consuming 4.3 million barrels per day, is experiencing fastest growing oil consumption in the World right now. Ownership of refinery and access to retail network in India would be an excellent hedge against fluctuating oil prices,”said Debasish Mishra, partner at Deloitte Touche Tohmatsu India Pvt. Ltd.
An analyst with a domestic firm said, “With this transaction, Rosneft gets a good access to the India market and will reap the benefits of a ready infrastructure in place.”