Question

Oil and Natural Gas Corporation (ONGC), the country’s largest oil and gas producer, today completed the acquisition of government-owned fuel retailer Hindustan Petroleum (HPCL) through an all cash deal worth Rs 36,915 crore, the company said in a Bombay Stock Exchange (BSE) filing today. The company had tied up Rs 35,000 crore with seven banks including three private and four public sector banks to fund the acquisition of Hindustan Petroleum (HPCL). While ONGC has secured loans for Rs 35,000 crore through banks, the details of funding the rest of the acquisition amount, Rs 1,915 crore, are not in public domain. "The transaction is in furtherance of the Government's objective to combine the various central public enterprises to give them capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders and create and 'Oil Major' which will be able to match the performance of international and domestic private sector oil and gas companies," ONGC said in a BSE filing. The company added that post acquisition the integrated oil company will be able to balance upstream and downstream pressures despite volatility in crude prices, will lead to lower earnings volatility, diversified cash flows and lower business risk resulting in higher PE multiples and valuations resulting in higher shareholder value. Postacquisition, HPCL will continue to operate as a separate listed entity with its board of directors and senior management separate from ONGC, Shashi Shanker, Chairman had told ETEnergyWorld earlier this month. The combined market value of ONGC and HPCL is estimated to be around Rs 3,11,925 crore, or $49 billion, comparable with Russian energy giant Rosneft's $61 billion. The board of ONGC had on 19 January approved the acquisition of the entire 51.11 per cent shareholding (778,845,375 equity shares) of the President of India, at a cash purchase consideration of Rs 473.97 per share. The company entered into the share purchase agreement with the President on 20 January. The acquisition of HPCL by ONGC has paved the way for the country’s first verticallyintegrated oil major. Finance Minister Arun Jaitley, in his budget speech last year, had announced the government’s plan to consolidate and integrate oil and gas Public Sector Undertakings (PSUs).

Question 1. Explain the different types of theories of mergers that were considered in the ONGC-HPCL saga

IN detail

20 marks quesrtion

NO SHORT ANSWER

Answer 1

Oil and Natural Gas Corporation (ONGC), the country’s largest oil and gas producer has acquired, government-owned fuel retailer Hindustan Petroleum (HPCL) through an all cash deal worth Rs. 36,915 crore.

Aquisition is a corporate transaction where one company purchases a portion or all of the another company's shares or assets.

Aquisitions are made to:

• Capture synergies, i.e advantages that come about through the integration of two companies that, individually, the two companies would be unable to achieve.
• Aquisition also helps to increase the market share of the company.
• It gives the company economies of scale i.e increased access to capital, low cost and increased volume of production with better bargaining power.
• Backward merger further gives benefit of control over distribution and purchasing to bring in economies of scale.

This acquisition of HPCL lead ONGC to expanding its presence accross oil exploration, production and distribution. It will help ONGC in scaling up rapidly.

The rationale behind this move is that a bigger, vertically integrated oil company can help India achieve the scale required to compete at the global level and help better absorb oil price shocks. Also the scale of HPCL could contribute almost Rs.30000 crore to the exchequer and fulfil more than a third of the year's disinvestment target.

The deal provides an opportunity to HPCL for backward integration which would help in sourcing stable crude for its refiners in the current time of rising oil prices and help in protecting margins. For ONGC it will enable integration with a major OMC (oil marketing company) and provide access to end markets for its products. it will also help them in bidding together for bigger global oil fields which are often outside the reach bringing in economies of scale.

Another beneficiary of this acquisition is central goverenment as it helped them in dealing with the huge fiscal deficit which they are presnetly facing.

All this, makes the ONGC- HPCL deal look like a bonanza for the government, the oil sector and overall economy.