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MOSL: OIL & GAS-It’s a spade after all!; ONGC to buy government’s stake in HPCL

Oil & Gas: It’s a spade after all!; ONGC to buy government’s stake in HPCL

Since the announcement of the creation of mega oil and gas companies in the last budget, ONGC’s acquisition of the government’s stake in HPCL has been a trending subject. Several confusing news articles on the modalities and valuations flooded the street. ONGC’s following announcement finally calls a spade a spade:

• In a cash transaction, ONGC will acquire the government's entire stake in HPCL at INR473.97/share, implying 13.7% premium to its six month average price.
• SEBI has exempted ONGC from the regulatory requirement of an open offer.
• The deal is to be closed by the end of January 2018.
• No further regulatory approval is necessary.

 

Win-win for minority shareholders of both companies

• In our report on the potential ONGC-HPCL merger, July 2017, we had ascribed a valuation of INR350-470/share for the acquisition of HPCL, based on multiple methodologies. Our target price for HPCL was INR427 then, which we subsequently raised to INR576 on account of increased efficiencies and better outlook on refining margins.
• Amid lack of significant cost efficiencies/synergies, valuation has been tricky - the street would ascribe a holding company discount to ONGC's stake in HPCL.
• We believe the current purchase price, though below our target price for HPCL, is a win-win situation for the minority shareholders of both companies. While ONGC would not be penalized through unwarranted premium, HPCL's minority shareholders would continue to benefit from earnings upside in the stock.