Billionaire brothers Shashi and Ravi Ruia are likely to end up owning less than 10% of their flagship Essar Oil refinery after selling a controlling stake to Russian energy giant Rosneft PJSC and a smaller one to global commodities trader Trafigura Group Pte, four sources with direct knowledge of the matter said.
While Rosneft will acquire a 49% stake from the Ruia family, Trafigura will buy 24% of the company at an equity valuation of around $6 billion in a deal that has been in the works for over a year. Essar Oil also has $4.5 billion of debt. Another financial investor is likely to come on board for a 15-20% stake, eventually leaving the Essar group promoters owning just about 5-8% or even less, as per the sources mentioned above.
The identity of the third investor could not be independently verified but sources said it is likely to be a sanctions-compliant fund.
The plan is to make a formal announcement this weekend at the Goa BRICS summit that will be attended by Prime Minister Narendra Modi and Russian President Vladimir Putin after the Rosneft board —scheduled to meet later Thursday evening or Friday early morning in Moscow — ratifies the deal. Rosneft’s chairman of the management board, Igor Sechin, is also slated to be in Goa along with Putin’s delegation. «There are still some last-minute issues that need ironing out like the quantum of investment by the third investor and the board approvals,» said an official privy to the ongoing discussions on condition of anonymity. «Efforts are on to make a grand announcement during the BRICS meet this weekend.»
Following Russia’s expansionist foreign policy and conflicts in Ukraine, western countries have imposed sanctions on Russia and several of its companies. Selling more than a 49% stake to Rosneft is not favoured as it may expose Essar Oil to risks that stem from this.
Vadinar terminal, petrol stations
The second phase of the deal will see demerger of captive Vadinar terminal from Essar Ports. The terminal will also be included in the Rosneft transaction. Essar Oil runs the Vadinar refinery in Gujarat, which can process about 400,000 barrels a day. Most of the refinery’s output is sold locally, either through its own outlets or to government-owned fuel retailers. In July last year, Rosneft signed an agreement to supply Essar about 200,000 barrels of crude per day over 10 years. Most of the crude or finished products use Vadinar.
Essar’s retail network of around 2,000 petrol stations is also going to be included in the deal. The plan is to take it to 5,000 in the next two years. Spokespersons of Essar, Rosneft and Trafigura declined to comment.
Once completed, the transaction will help Essar deleverage its balance sheet by half in one shot and will also enable the promoter holding company to retire debt. The conglomerate has been grappling with debt after an $18-billion spending spree to build power plants, steel plants and oil refineries. The group has been struggling to maintain sales and profitability amid commodity price volatility and slowing demand.
Proceeds from the stake sale will be used for repaying Standard Chartered Bank, ICICI Bank and Axis Bank, which have lent to the group’s offshore holding company, Essar Global Holdings, now renamed Essar Global Fund, the people cited above said. The three banks together have around $3.5 billion (Rs 23,300 crore) of exposure to Essar.
Russian bank VTB, which bankrolled the delisting of various Essar group companies in India and London, may buy out a part of these loans, banking sources said.
Russia has been consolidating energy ties with India, which is expected to surpass Japan as the world’s thirdlargest oil user this year and become the fastest-growing crude consumer through 2040, according to International Energy Agency estimates.
«The deal will help Rosneft build a smaller hub in India, expand its footprint in the region and reduce its distribution cost to its suppliers in the region,” said an oil expert. Rosneft will also get an assured supplier of its crude apart from the backward integration of an operating refinery and a large market for its products.» Oil and gas companies globally have struck $132 billion of deals this year, down from $196 billion in the year earlier, according to Bloomberg data.
A group of state-owned Indian energy companies is investing $5.5 billion to buy stakes in Rosneft’s Vankor and Taas-Yuryakh fields. Last December, the Ruias delisted Essar Oil India by buying out a 10% stake held by minority shareholders for Rs 3,347 crore. The delisting valued the company at Rs 33,470 crore and this is expected to serve as a benchmark during negotiations.