ONGC-HPCL DEAL – A WIN-WIN FOR GOVT ONLY

By Ruma Dubey

Last week, the mega “oil” deal  - ONGC and HPCL was the talk of the town.

On 19^th July, the Cabinet gave its approval to ONGC to buy Government’s 51.11% stake in HPCL. Post this merger, HPCL will remain a subsidiary of ONGC and this is expected to be completed in one year.

The deal will be exempted from the mandatory open offer when buying more than 25% in a listed company. At the current market price, ONGC would be shelling out around Rs.25,000 to 29,000 crore for HPCL’s stake and after paying the premium, one-third of Govt’s divestment target of Rs.72,500 crore will be met.

Obviously, this is very good news for ONGC, at least on the face of it because it will become a fully integrated oil company – right from exploring crude oil to marketing; upstream and downstream, all rolled into one.

But the HPCL shareholders are most certainly short changed. The exemption from the open offer means that minority shareholders are left with no exit route; actually it means they have no say whatsoever in this deal. Like cattle being taken led to the abattoir, HPCL shareholders can only bend their head and accept what is being forced upon them.

What irks is the control of the Govt. This all-cash deal to buyout the HPCL stake is done at the behest of the Center.  It is not that ONGC is so flush with funds that it can buy this stake from internal accruals. The Chairman of the company has made it very clear that ONGC will have to take on more debt to fund this buy. So the question is why? When the buyout could have been done through share swaps or through an all stock deal, why this need to do all in cash, putting stress on ONGC’s balance sheet?

The answer is obvious isn’t it – this way, through cash deal, the Govt because of its stake will rake in enough money to meet at least one third of its divestment target of Rs.72,500 crore. Imagine one deal and one third of its target is met!

ONGC, apart from the money to be paid to buyout Govt stake, might need to pay a 40-50% premium on the stake sale. ONGC, as at 31^st March 2017 had a cash reserve of Rs.16,648 crore  and including the premium and stake sale, will have to fork out around Rs.40,000 crore. Clearly, it does not have the required cash and will thus have to take on more debt. It is not as though ONGC is debt free – at end of FY17, its debt was already pretty big at Rs.55,682 crore.

So ONGC goes and buys out Govt’s stake by increasing its debt and which in turn means, it curtails all its future investments and expansions. As foreign brokerage house CLSA suggested, why can’t ONGC sell its 13.8% stake held in IOC as it would fund almost the entire deal without having to resort to debt?  Obviously, if divestment coffers are to be filled, how can such logical steps be taken? The aim is not to make ONGC stronger but more short term – of meeting its targets as 2019 approaches.

If this deal goes through, the Govt would have struck a gold mine – it will look at other cross holdings where it can ‘force’ companies to sell stake and earn cash.

This again brings to mind the lack of autonomy which PSUs have, making us wonder why we look at PSUs at all when they are all but nothing but mulch cows and bailouts for the Govt.