Independents' day

JPMorgan in awkward place in Essar Energy buyout

It's time for some new faces in the Essar Energy saga. The prospect of a lowball buyout by India's Ruia brothers, the majority owners, has riled minority shareholders. So it is far from ideal that independent directors of the London-listed firm have asked JPMorgan for advice. The bank is awkwardly close to the situation. Board members urgently need some fresh outside perspective.

The Ruias argue a lot has gone wrong since the 420 pence-a-share float four years ago, most of it outside their control. Indian growth has slowed, coal licences have been held up, and the taxman has been tough. Nonetheless, at 70 pence a share, or a total equity value of £900 million, their proposal looks stingy.

Some analysts reckon the stock is worth considerably more: as of February 17, Citi had a 130 pence price target. In addition, the owners may have depressed the share price, as their dithering about selling enough shares to hit a mandatory 25 per cent free float has created an overhang. Hence anger from investors such as David Cumming at Standard Life, who diagnoses "cynical opportunism" at work.

Against this backdrop, the independent directors' first choice of advisers looks peculiar. JPMorgan sponsored the IPO, helped Essar Energy sell convertible bonds and buy Britain's Stanlow refinery, and remains a broker. Linklaters, the legal adviser, is less close, but advised JPMorgan on the float.

JPMorgan's familiarity will allow the independent directors to get to work straight away. Still, that is not an overwhelming advantage. Deal advisers are used to getting up to speed very fast. And the directors don't actually have a firm offer yet to consider. They could have tolerated a short delay and hired fresh advisers from the start.

Newcomers would be able to review the company's chequered history dispassionately, avoiding any suspicion of dual loyalties. That is crucial in buyouts by controlling shareholders. The independent directors must do, and be seen to do, everything they can to avoid a raw deal for minorities.

An Essar Energy spokesman says the independent directors' committee is considering bringing in a second, independent financial adviser. Good idea.