• APRIL 4, 2001

Energy: Price of industry restructuring

The restructuring within the energy sector is complete. The road map was laid down by the Sengupta committee, which put forward the proposal of merging stand-alone refineries with their refining and marketing (R&M) counterparts.

Bharat Petroleum (BPCL) and Indian Oil (IOC) have completed their acquisition of stand alone refineries. BPCL has acquired Kochi refineries (KRL) and is in the process of completing the acquisition of Numaligarh Refineries (NRL). IOC on the other hand has completed the acquisition of both Chennai Petroleum (CPCL) and Bongaigaon Refinery and Petrochemicals (BRPL).

Cost of Consolidation
No. of shares m 137.8 147.2 199.8
Government holding 55.0%52.5%74.5%
Shares acquiredm 75.8 77.3 148.8
Purchase price Rs 86.0 65.9 10.0
Acquisition costRs m 6,522.7 5,095.3 1,487.9
MP*Rs 56.6 36.1 8.3
Premium to MP 51.9%82.6%21.2%
Book ValueRs 95.8 78.3 30.9
* At time of announcement

Was the deal worth it…
CapacityMMTPA 7.5 7.0 2.4 3.0 7.0 35.5
EVRs m 16,158 19,417 2,202 9,053 78,537 257,640
EV / tonneRs 2,154.4 2,773.8 917.6 3,017.5 11,219.6 7,257.5
* Based on the acquisition price by R&Ms

The EV (Enterprise Value) per tonne for stand-alone and refining & marketing (R&M) companies will differ as BPCL and IOC are better integrated along the value chain (have access to marketing infrastructure). The value of their marketing infrastructure is included in the EV, which leads to the disparity.

Although the acquisition price has been significantly higher than the market price, on an EV per tonne basis the deals look attractive for BPCL and IOC. As per industry estimates the cost of setting up 1 tonne of refining capacity is approximately Rs 5,500. This again is dependent on the complexity of the unit. A discount to this figure may indicate that the capacities are old and low on complexity.

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