US private equity firm drops out of BPCL race

US private equity firm I Squared Capital is dropping out of the race to buy India's second-largest state oil firm, Bharat Petroleum Corporation Ltd (BPCL) owing to a complex deal structure and lack of financial backers for the transaction, sources said.

I Squared Capital through its Indian arm, Think Gas was among the three suitors that had evinced interest in buying the government's near 53 per cent shareholding in BPCL.

"The company has made a decision not to participate in the financial bidding," a source with direct knowledge of the development said.

"The firm has not communicated the decision yet to the government or its transaction advisor but has decided not to go ahead," the source added.

While emails sent to I Squared Capital and the Department of Investment and Public Asset Management (DIPAM) - which is running the privatisation plan - remained unanswered, a senior government official said the government will not be aware of such a development as only the transaction advisor would be privy to such moves and that there was an iron curtain between the government and the transaction advisor on such issues.

Besides I Squared Capital, mining baron Anil Agarwal's Vedanta Group and private equity firm Apollo Global Management are the other bidders.

Both I Squared Capital and Apollo Global talked to global energy giants and sovereign and pension funds to get financial and strategic support for the bid but failed to elicit much interest, another source said.

"Infact at one point even Royal Dutch Shell was talking to two PEs but later backed out," the source said.

Some reports suggest Adani Group joining the PEs but that wasn't true, a third source said.

I Squared Capital, the first source said, faced the problem of getting backers for a firm that runs old oil refineries and has business spread from oil refining to fuel marketing, gas and even upstream gas exploration and production assets.

"Investors typically want to get access to the world's fastest-growing fuel market. BPCL would give the buyer readymade access to 23 per cent of the fuel market share.

"But not many are interested in the high investment required for the gas field the firm holds in Mozambique or its minority shareholding in Petronet LNG Ltd," the source said.

The firm's 12.5 per cent stake in Petronet would require the buyer to not just make an open offer to the minority shareholder of BPCL but also to those of India's biggest liquefied natural gas (LNG) importer.

Some found it difficult to invest due to sustainability rules that make it tougher for them to buy a stake in an oil refiner. BPCL owns over 14 per cent of India's oil refining capacity.

The move by I Squared Capital could temper some of the euphoria generated by the recent sale of Air India to the Tata Group and could slow down the nation's biggest privatization drive.

Sources said US-based PE firms are finding it difficult to get funds and financial partners as a global push toward green energy and pressure to slash emissions is holding back companies from making large investments in fossil fuels.

The bidders for BPCL have been slow in conducting due diligence as they wait for new partners to join, they said adding the company allowed bidders virtual access to its financial data early April, but it hasn't progressed beyond the exchange of a few queries and some initial discussions with the company's management in the past six months.

BPCL owns 35.30 million tonnes of oil refining capacity spread over three refineries at Mumbai, Kochi in Kerala and Bina in Madhya Pradesh. It has 19,251 petrol pumps and 6,182 LPG distributors.

At current trading price, the government's 52.93 per cent stake is worth about Rs 49,000 crore.

The successful bidder would also be required to make an open offer for an additional 26 per cent stake from minority shareholders which would be another Rs 24,000 crore.

The bidder would also have to make an open offer worth Rs 19,000 crore for Petronet and Indraprastha Gas Ltd, where BPCL is a promoter firm.

"Bidders are conducting due diligence, but uncertainty over the bidder consortium and process complexity, including valuation, may lead to potential delays," Fitch Ratings Ltd said in a commentary last month.

"We believe the risks of further COVID-19 waves and global oil and gas companies' increased focus on energy transition lead to additional uncertainty over the timing and valuation of potentially large acquisitions in the sector," it noted.

Photograph: ANI Photo