Feb 10, 2004|
Poll: Govt. unlocking value from oil PSUs
The Government has never shown so much aggression on disinvestment of PSUs as it has during the fiscal year 2004. As per the budgetary estimates, the Government had planned revenues to the tune of Rs 145 bn during the current fiscal, FY04. However, the ruling against the divestment of Government stake in BPCL and HPCL has been a major setback in the plans, which led us to conduct a poll on our website asking investors as to which is the best way for the Government to unlock value from its holdings in oil PSUs?
The three options provided were IPO, merger of holdings and strategic sale of investments.
As per the results, 21% of the respondents were of the opinion that the Government should tap the public issue route so as to divest its stake. On the other hand, only 2% felt that mergers would help the companies benefit, while a thumping majority (77%) voted in favour of a strategic sale of Government stake in the oil PSUs.
Analysing the Initial Public Offer route:
With the Government planning to mop up a huge chunk of realisations from its disinvestment plans, thereby reducing the fiscal deficits and the indices supporting the bullish trend, the feel good factor prevailing, this route shall be an ideal exit route for the Government, since the capital markets also lead to price discovery. However, we need to look at it from the company's perspective, as to what is the value addition done to the company after the divestment of stake. Although, after the divestment, the Government stake shall reduce to an extent and the management shall be professional in its approach, one needs to look at the material benefits that might just not exist. Here, if the Government decides to go into lock a strategic partner after the IPO, it would provide better value realisation. The Government in this case shall not only increase the liquidity of the stock but at the same time roping in a strategic partner shall lead to an exit route for the retail investor.
In this scenario, the Government can bring in two different public sector entities together, that are catering to two different segments of the industry. For example, if GAIL were to be merged with HPCL. The merger shall lead to major benefits in terms of economies of scale and synergies being added to the combined entity. In the case of such a merger taking place, HPCL could use the pipeline network of GAIL to expand its reach and at the same time GAIL can benefit from higher and assured volumes through HPCL. The combined value created by the merger of the two shall be higher than the value created by one single entity. Thus, if the Government was then supposed to divest its stake in the merged entity, the value derived from the same shall be far more than on an individual basis. On the flip side, the merger will bring in confusion at the helm regarding the direction the entity should undertake. Moreover, being still state owned has its own disadvantages.
A strategic sale of the oil companies and thereby transferring of management control shall lead to more professionalism in the management. The acquiring company shall benefit from the synergies and the operations that come along with the acquired company. Not only will the acquiring company benefit from the expertise of the existing managers, but at the same time the benefits shall accrue in the form of established clientele and network that the acquired company already has. The acquisition of the strategic stake shall prove to be a rather cheaper route to enter into new markets than to set up own capacities. The existing capacities shall prove to be a major benefit to the acquiring company. For example, if Reliance Industries is able to take a strategic stake in HPCL, not only shall the former have access to the refining capacities but also to the huge marketing network that HPCL has in place, which can be used by Reliance for marketing and distribution of its own refining products. In case, the strategic sale is to the extent of 15% or more, the company shall have to go in for an open offer, which shall provide an exit route to the retail investor.
At the end of the day, it could easily be concluded that the Government should unlock its stake in the oil PSUs so as to let the market forces and free competition take over and drive growth. In today's scenario, where the saying goes "Survival of the fittest", let the strong players have a healthy competitive environment to fight it out on even grounds. The world over, major oil players are the ones with a presence in every straddle of the oil sector, be it, exploration, refining or downstream activities such as marketing and distribution.
The results clearly determine that the most popular way for the Government to divest its stake is the strategic sale route, although the other routes can also indirectly lead to a strategic sale. However, one thing that is certain is that the Government actually needs to play the role, more of a facilitator than the owner of the companies, and let the free market forces and private players take over the sector in a healthy competitive environment.
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