Will Rosneft deal benefit Essar Oil shareholders?

After PJSC Rosneft Oil Co.-led consortium’s deal to buy 98% of Essar Oil, the lens shifts to whether minority investors of the Indian firm will gain from this transaction. 

In December, these shareholders had tendered their shares in Essar Oil’s delisting process. At that time, the Securities and Exchange Board of India (Sebi) passed an order that said these share-owners should be paid the difference between the transaction price with Rosneft and the final delisting price.

On Saturday, at a press conference to announce the deal, Prashant Ruia, director at the Essar Group, said equity value of the deal was very much near the delisting price, which means minority shareholders don’t have much to gain.

On the other hand, proxy advisory firms have projected that small shareholders stand to gain anything from Rs94-125 a share, on top of the delisting price of Rs262 a share.

“As per (Sebi) order, the company must pay differential amount to shareholders who tendered shares. The differential is worked out based on delisting price and intrinsic value of shares in the current deal,” said J.N. Gupta, co-founder and managing director of Stakeholder Empowerment Services (SES), a proxy advisory firm. 

SES calculated the share price of the Essar-Rosneft value transaction to be anywhere between Rs357 and Rs388 a share. It has calculated this by deriving an equity value for the deal by deducting it from the enterprise value of the deal. A statement from the Essar group said the Rosneft deal was concluded at an enterprise valuation of Rs72,800 crore for a 98% equity.

There is, however, a caveat to the SES calculation. It has based its calculations on the last available annual report of Essar Oil and the numbers pertain to March 2015. At that time, the firm had Rs17,612 crore in debt, according to the SES analysis and, thus, the total share price could be in the range of Rs357 to Rs388 a share (after adjusting for a working capital of Rs4,451 crore). 

Thus, the actual equity valuation of the deal will depend on the debt of the firm on the day it finalized the transaction. The latest publicly available numbers (which are also unaudited) date to a year ago.

Bengaluru-based Ingovern Research Services another proxy firm, and SES, both said Sebi must seek full disclosure of the deal-related documents and evaluate price the paid by Rosneft and others.

In any case, shareholders will know these details in another week or so.

The Sebi order also said that the company or its promoters have to issue a public notice within 10 days of finalizing the deal with details of the transaction, including the “number of shares to be purchased by Rosneft and the consideration (including all heads under which the final consideration price is arrived at between the promoter/s and Rosneft.”