India’s billionaire Ruia brothers agreed to sell a 98% stake in their refinery unit to Rosneft, Russia’s biggest listed oil producer, and a consortium of Trafigura and United Capital Partners for about $13bn.
Essar Group will sell 49% of Essar Oil each to Rosneft and the consortium for an enterprise value of Rs728bn ($10.9bn), the Indian conglomerate said in a statement on Saturday. The equity valuation will be about $5.8bn, the price at which the company was delisted, Essar Group director Prashant Ruia told reporters at a briefing in Goa.
The all-cash deal will help Essar, which also runs steel mills and ports, cut debt by more than 50%, Ruia said. The transaction includes India’s second-largest refinery at Vadinar, and another $2bn will be paid for a port terminal and power plant that helps feed the refinery, as well as about 2,700 pumps. All approvals are expected by the end of this year and most of the proceeds will go to retire debt, Ruia said. It will be the single-largest foreign direct investment in India.
The deal “proves the attractiveness of the Indian energy market to foreign investors,” Chanda Kochhar, chief executive of ICICI Bank, which was helping Essar reduce debt, said in a statement. “This deal is also a significant step in the process of deleveraging the balance sheets of Indian corporates.”
The deal shows how oil-rich nations are investing overseas into refineries to secure an outlet for their production amid an intense battle for market share between Opec and non-Opec countries. On top of Russia, Saudi Arabia is buying stakes in refiners through its state-owned oil giant Saudi Aramco in countries from Indonesia to the US. Kuwait is also investing in oil processing facilities.
Essar Energy Holdings and Oil Bidco (Mauritius) – which control Essar Oil – have signed separate agreements for the 98% stake sale. The first outlines the sale of 49% to Petrol Complex, a unit of Rosneft. The second sees the remaining 49% sold to Kesani Enterprises Co – owned by a consortium led by Trafigura and United Capital Partners.Russia’s VTB Bank will lend Essar $3.9bn to restructure debt, Andrey Kostin, VTB chief executive, told reporters at a separate briefing in Goa Rosneft itself will pay about $3.5bn for the Essar deal, Kostin said. Russia has been deepening energy ties with India, which is expected to surpass Japan as the world’s third-largest oil user this year to become the fastest-growing crude consumer through 2040, according to International Energy Agency estimates. India’s state-owned energy companies are investing $5.5bn to buy stakes in Rosneft’s Vankor and Taas-Yuryakh fields.
The transaction – which Essar said is the biggest tranche of foreign direct investment in India – was announced on the sidelines of the Brics summit, attended by Indian Prime Minister Narendra Modi and Vladimir Putin. It has the support of both their governments, Ruia said. He added that he doesn’t see sanctions on Russia affecting the deal.
For Trafigura, the world’s third-largest oil trading house behind Vitol Group and Glencore, the acquisition is its largest energy deal and marks a deepening of its relationship with Rosneft.
The trading house is already providing short-term trade finance to the Russian company and is trading a significant chunk of its oil production.
Trafigura, which is owned by its senior employees, said it will finance the purchase through bank finance using its stake in the refinery as collateral plus its own equity. Trafigura said it didn’t plan to tap the bond market for the deal.
The Trafigura consortium includes the trader itself with a 49% stake, UCP with another 49% and Essar with 2%. Trafigura will effectively control 24% of the refinery. For the trading house, it’s the second attempt to enter the Indian oil refining market, after a failed deal five years ago.
Rosneft and Essar had signed a non-binding pact on the deal in July 2015. Rosneft had also signed a pact to supply Essar Oil about 200,000 barrels of crude per day over 10 years.
Conclusion of the sale would help Essar Group generate funds to repay lenders after it loaded up on debt to fund an $18bn spending spree.
Essar Oil runs the Vadinar refinery in the western state of Gujarat, which can process about 400,000 barrels a day. Most of the refinery’s output is sold locally, either through its own outlets or to government-owned fuel retailers.