Rs 86,000-cr Essar Oil-Rosneft deal cleared

The agreement came in after the Ruias agreed to clear most of the Rs 26,000-crore dues to the lenders on completion of the transaction.

A consortium of 23 lenders led by State Bank of India on Friday cleared the Rs 86,000-crore (Rs 860 billion) sale of Essar Oil to Russia's Rosneft-led group after the Ruias agreed to clear a part of the Rs 26,000-crore (Rs 260 billion) loans, including that of Life Insurance Corporation.

Essar Group sources said they hope to conclude the $12.9-billion all-cash deal to the Russian government-controlled Rosneft by July 10. This is the largest foreign investment in the country till date.

When asked whether the 23 lenders also include LIC, to which the company owes Rs 1,290 crore (Rs 12.9 billion), an official answered in the affirmative.

According to the sources, the agreement came in after the Ruias agreed to clear most of the Rs 26,000-crore dues to the lenders on completion of the transaction and transferring the remainder to a new owner, which is better-rated. Sources did not elaborate on how much of the existing loans will be cleared though.

"The fact is that LIC has nothing to do with Essar Oil. The Rs 1,290-crore loan from LIC is towards Essar Power. But still we decided to clear that loan by agreeing to pay Rs 850 crore (Rs 8.5 billion) to LIC," an Essar official told PTI.

It can be noted that LIC's refusal to clear the sale was one of the biggest stumbling blocks to the completion of the largest corporate deal in the country that was signed on October 15 last year in the presence of Prime Minister Narendra Modi and Russsian President Vladimir Putin in Goa on the sidelines of the BRICS summit.

The Rs 86,000-crore transaction involves the Ruias completely exiting its cash cow to Russian giant Rosneft and a consortium led by Trafigura-UCP.

"The joint lenders forum of 23 lenders led by SBI and ICICI Bank met in Mumbai this morning and approved and authorised the release of shares of Essar Oil to facilitate the stake sale to Rosneft and the investment consortium led by Trafigura and UCP," the company said.

The refinery at Vadinar on the west coast of Gujarat has a debt of Rs 26,000 crore. Out of this, SBI alone has around Rs 3,500 crore (Rs 35 billion). While a text message to SBI did not elicit any response to confirm the development, an ICICI Bank source confirmed it.

Igor Sechin, chief executive of Rosneft, had told the company's AGM on Thursday in Moscow that the transaction with Essar Oil could be "considered as closed".

The deal involves the 20-million tonne per annum or a 405,000-barrels-a-day refinery in Vadinar, along with 3,500 oil retail outlets across the country (making it the largest private sector fuel retailer), a 1,010-mw captive power plant, and a 58 million tonne port facilities.

The refinery accounts for almost 9 per cent of the country's total oil refining output, according to the company.

Snapping up the refinery would get the Russians a strong foothold in the world's fastest growing fossil fuel market that is India, where oil demand is expected to grow 5-7 per cent in the next five years, as per industry estimates.

The deal involves Rosneft buying 49 per cent stake in Essar Oil's refinery, port and petrol pumps, while the Netherlands-based Trafigura Group, one of the world's biggest commodity trading companies, and Russian investment fund United Capital Partners will snap up another 49 per cent equity equally. The remaining 2 per cent will be held by minority shareholders after delisting of Essar Oil.

The deal has an enterprise value of close to $12.9 billion -- $10.9 billion for the refinery and for the filling stations and another $2 billion for the Vadinar port.

The deal factors in Essar Oil's debt of about $4.5 billion and about $2 billion debt with the port company.

The deal, however, excludes around $3 billion dues to Iran for past oil purchases by the refinery.

Of the $12.9 billion value, $6.5 billion is for the debt with Essar Oil and port. Another $0.5 billion is for working capital, leaving $5.9 of equity value which is equal to the delisting price of Essar Oil.

The biggest FDI for India and the largest outbound deal for Russia was expected to be closed in April.

Essar Oil will continue to own and operate the 12 million tonne Stanlow refinery in Britain and has 12-13 per cent market share. Also, the group will continue with the upstream exploration and production business.

Russia's VTB Bank will lend Essar $3.9 billion to restructure debt, while Rosneft itself will pay about $3.5 billion to Essar.

Image: Oil refinery of Essar Oil in Vadinar in Gujarat. Photograph: Amit Dave/Reuters