Mumbai: State-run Bharat Petroleum Corp. Ltd (BPCL) is in talks with the country’s largest natural gas transporter GAIL (India) Ltd to acquire the government’s majority stake in it for Rs18,000-20,000 crore.

Three people with direct knowledge of the discussions said this on condition of anonymity as the talks are at a nascent stage and the government has not formally approved the plan.

“BPCL is interested in a merger with GAIL to expand its range of businesses and the government has been informed about it. Any merger should happen at the fair market price but there may be some premium to the prevailing value of the stock because these companies are Maharatnas," said a finance ministry official.

“With BPCL’s aggressive plans to expand in the gas sector, GAIL is a perfect fit for BPCL offering it a ready market. The nitty gritties of the deal are being discussed," said the second person, who is a senior official at one of the two firms.

Neither BPCL nor GAIL responded to emails sent on 15 September seeking comments.

BPCL, the country’s second largest fuel retailer, has a market value of Rs1.08 trillion, second only to Indian Oil Corp. Ltd., which had a market cap of Rs2.01 trillion as of Friday. GAIL is valued at Rs33,817.61 crore.

GAIL is currently laying down the 2,539-km Jagadishpur-Haldia-Bokaro-Dhamra Natural Gas Pipeline (JHBDPL) to supply energy to homes and refineries in eastern India.

The project, which is likely to be commissioned by December 2020, will connect locations across Uttar Pradesh, Bihar, Jharkhand, West Bengal and Odisha and supply feed gas to anchor fertilizer units at Gorakhpur, Barauni and Sindri.

Even though the BPCL-GAIL merger talks are at an initial stage, the government has held discussions with investment banks SBI Capital Markets Ltd to examine the best possible structure of the deal and its synergies.

Varsha Purandare, managing director and CEO of SBI Capital Markets said: “We and the government engage in talks for a number of potential transactions. We cannot comment about the BPCL-GAIL merger plans at the moment." 

To be sure, BPCL and GAIL already operate together through a few joint ventures in the city gas distribution space. These companies include Indraprastha Gas Ltd, Central UP Gas Ltd, Maharashtra Natural Gas Ltd and Goa Natural Gas Pvt. Ltd.

As of March 2017, IGL had 421 CNG stations in Delhi and NCR and over 740,000 domestic piped natural gas customers in Delhi and its suburbs.

“By acquiring a majority stake in GAIL , BPCL will automatically get a large customer base. This will work well for BPCL," said the second person quoted above.

BPCL plans to invest Rs1.08 trillion over the next five years to expand operations across its business segments, chairman and managing director D. Rajkumar told reporters at a post-annual general meeting press conference on 12 September.

Last financial year, BPCL started directly importing its liquified natural gas cargo at Petronet LNG Ltd’s terminal in Dahej.

“Own imports would benefit BPCL to be competitive in the market and would also be economical to our refineries. Continuing the efforts to expand the gas business, BPCL has been participating actively in the bids invited by Petroleum and Natural Gas Regulatory Board (PNGRB) for developing city gas distribution networks," BPCL said in its latest annual report.

During the year, in the sixth PNGRB bid round, BPCL won permits to supply piped gas in five regions including north Goa, Saharanpur, Yamunanagar, Rohtak and Rupnagar. While north Goa was bid jointly with GAIL Gas Ltd, the other four areas were bid by BPCL alone.

The government holds 54.88% stake in GAIL and as per Friday’s stock closing, BPCL could have to pay around Rs18,000 crore to buy out this stake for the planned merger. 

According to the government’s plan, state-run oil and natural gas explorer Oil and Natural Gas Corp. Ltd is in the process of buying the government’s 51.11% stake in fuel retailer Hindustan Petroleum Corp. Ltd.

According to a 18 July report by The Economic Times, state-run Indian Oil Corp. Ltd is in talks to buy out the government's 66% stake in energy explorer Oil India Ltd.

If everything goes as per the plan, the consolidation in the energy industry through divestment of the government’s stake in various oil and gas firms could generate significant non-tax revenues for the exchequer and help the government meet its disinvestment target of Rs72,500 crore for the financial year.

Finance minister Arun Jaitley, in his budget speech, had announced the government’s plans to merge state-owned energy firms in order to create integrated domestic oil majors to compete with global energy giants.

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