Essar de-listing: Ruias counting on funds from Hutch stake sale?

29 January 2007

The offer from the Essar Group to buy-out minority shareholders of Essar Oil and Essar Steel may be an indication that the group has decided to sell its stake in Hutchison Essar. By Rex Mathew

 The Essar Group, controlled by the Ruia brothers, has announced its intention to acquire the shares of minority shareholders in listed group companies Essar Oil and Essar Steel and take these companies private. If the minority shareholders accept the offer, shares of both the companies will be de-listed from the stock exchanges.

This is one of the biggest ever offers by a promoter group to buy out minority shareholders in India. Most of the earlier instances have been foreign parents offering to buy out domestic shareholders of Indian subsidiaries. The most recent of such offers was by Oracle to take i-Flex Solutions private and there is speculation that Standard & Poor's may make a similar offer for Crisil.

The actual buy-out would not require substantial funds as the Essar Group already owns most of both companies. The group has a 87.96 per cent stake in Essar Oil which has a market capitalisation of Rs 7,225 crore at today's closing levels. Essar holds a 87.09 per cent stake in Essar Steel which is currently valued at Rs 5,739 crore. Even if the final offer price is 20 per cent above current valuations, the Essar Group would require less than Rs 2,000 crore to buy out minority shareholders in both the companies.

Promoters decide to take their listed companies private when they feel the stock market is not valuing the businesses correctly or when their status as publicly listed companies limits management flexibility. However, it is not very often that promoters decide to de-list companies with large expansion plans operating in capital intensive sectors like oil and gas and steel.

Both Essar Steel and Essar Oil have very large expansion plans, which would involve billions of dollars in investments over the next few years. Just last week, the Essar Group had stated its intention to raise the refining capacity of Essar Oil to 30 million tonnes per annum from the current 10.5 millions. The company is also interested in expanding its upstream business of oil and gas exploration. Essar Steel, which currently operates a 3-million tonne steel plant, has plans to set up new integrated steel mills.