Merger may be preferred route for ONGC, HPCL

The consolidation among public sector oil companies could start with a merger, rather than a takeover. Senior government officials say a merger or an amalgamation could obviate the need for an open offer to buy equity from minority shareholders. The first to get off the ground would be Oil and Natural Gas Corporation (ONGC) and Hindustan Petroleum Corporation Ltd (HPCL). If the idea of a merger or an amalgamation is accepted, such a route would not burden ONGC. A takeover would have resulted in HPCL becoming a subsidiary of ONGC. 

In case of an amalgamation, the two entities do not exist and a new entity is created, while in a merger, one company merges into another. Both the options do not require open offer and the regulatory procedure is same for them. 

Though an official said GAIL, too, was keen to take over or look at merger with Oil India or one of the oil marketing companies, it is the ONGC-HPCL consolidation that would kick off first.

No timeline has been decided. The government recently appointed consultancy firm Deloitte to come up with options for consolidation and give a report by July. 

Under the Takeover Code prescribed by the Securities and Exchange Board of India (Sebi), if an entity acquires more than 25 percent stake or takes over the management of a listed company, it has to make an open offer on equal terms. The public holding in the company being taken over should, however, not fall below 25 per cent, a requirement for listing.

Mahesh Singhi, managing director of Singhi Advisors, said, “The amalgamation route will be the easiest option, since it will not entail an open offer. The boards of the two companies will have to approve a swap ratio and conduct a ballot for taking approval of the shareholders. Approval of the Competition Commission of India will also be required.”

He said the logic behind an open offer was that the approval of minority shareholders is not sought in a takeover. In a merger, each shareholder has the option of accepting or rejecting the offer.

At the current market valuation and assuming the same value of government equity is maintained, its holding in the merged entity will be around 65 per cent. The government would be in a position to monetise from the deal only later, if it decides to divest its equity in the merged entity. Since the public float would be higher than the mandatory 25 per cent, it would have a cushion. 

The merged entity created out of ONGC and HPCL could have a director responsible for refineries and one for marketing and retailing, said the official. A K Banerjee, former director (finance) of ONGC, has a different view. He said, “Amalgamation of the companies will be a difficult job. ONGC buying the government stake through the strategic route will be more effective but in that case, it will have to make an open offer. At present, downstream companies have a higher valuation and, hence, an open offer will make it costly”; A better option would be to create a holding company and bring both under its fold, he said. 

Experts believe the corporate culture of both companies also needs to be taken into account while integrating. ONGC is a technical-oriented entity; HPCL is more marketing and commercial oriented, said an analyst.

HPCL also began a postal ballot on Thursday on capitalisation of part of its reserve through issue of one bonus share of Rs 10 each for every two equity shares held as on July 12, 2017.