A Happy-Happy Deal Worth Just 72,800 Crores!

The BRICS summit has been a witness to a mammoth deal worth 72,800 crores. In case you got a chance to read t least one business magazine or newspaper in the past 5 hours, you would have already heard about the deal between Rosneft and Essar Oil. As far the markets are concerned, the deal seems to have eclipsed the Asian stock markets dip of the past few days. Moreover, the deal has enabled bankers like ICICI to gain. ( ICICI has gained around 6.85% at 11.50 am.)

Why is this a happy-happy deal? What’s in for Rosneft?
India is the third largest consumer of oil after US and China. Believe it or not, the consumption of oil on a yearly basis is over 41 crore barrels a day (Yes per day!). India is certainly a spectacular growth market as far as the crude oil is concerned. In fact, the demand in India was considered one of the prime reason for the reversal of global crude price fall. Automobile sales in India coupled with the growing desire for large cars and SUVs (that consume a lot of fuel) has spiked the demand for oil. If you want to get a feel of the car sales in India, the annual numbers crossed 2 million units the first ever time in 2015. This year (2016) too is witnessing brisk sales that is quite visible to the common man who can feel the rapid increase in the number of car on roads.

Hence, for obvious reasons, it is quite natural for a company of Rosneft size to gain entry into this rapidly growing market. There are good ways to do it, and a deal of this nature is the most efficient way.

Why Essar is Celebrating?
A growing debt is always a concern. Debt is not good and should be controlled as early as possible. This deal seems to empower Essar to wipe off close to half (50%) of its debt. The group debt stands at 88K crore approximately. This deal is an all-cash deal, and hence there should be minimal delay in debt reduction activities by the group. The sooner is the better for the company.

Though the oil division problem is sorted out, the company has work to do in the revival of Steel. The deal could offload a huge part of the burden so that the management could focus more on Steel. In fact, there are already indications that the demand for steel could be on the rise. The management is eyeing several restructuring plans that could boost the steel sector. Under such circumstances, the oil deal seems to hit the bull’s eye regards timing.

Why the banks are gaining?
We have to change the title of this post to “Happy-Happy-Happy” deal if we want to factor the banks into the equation. The banks like ICICI and Axis which are said to have exposure to the holding company will benefit by the deleveraging by Essar Oil. Especially at a time when banks are facing the pressure of NPAs, this could be a breather.

What’s in for minority stakeholders?
The stakeholders will be paid the difference amount between the valuation and the delisting price. The complex calculations are underway and would be made public in few days or weeks.

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