Great deal for GSPC under Gujarat government pressure?
Moneylife Digital Team 04 October 2012

GSPC may eventually end up with more than a 90% stake and possible delisting of Gujarat Gas. That too when there were several domestic and international buyers for the stake put on the block by the BG Group


The BG Group (formerly British Gas) has reached an agreement with GSPC to sell its majority stake in Gujarat Gas (BG owns a 65.12% stake) for Rs24.6 billion. The implied final deal price of Rs295/share (close to Nomura’s target price of Rs300) means a 12% discount to the current market price and a sharp 30% discount to the price when BG announced its intention to exit. BG had first announced its intention to exit Gujarat Gas in November 2011. The question being asked in corporate circles is that did the state government have a role in ensuring that GSPC got the deal and that too at a price that the state government wants?

 

It is reported that a clutch of government-owned firms, private companies and foreign entities were eyeing the 65% stake. PSUs BPCL, GAIL, ONGC, GSPC, private entities Adani Group, Torrent Power, and foreign firms European Gas Company GDF Suez, Germany-based E.ON looking at acquiring the BG Group’s promoter’s stake of Gujarat Gas Company. However, pressure from the state government is believed to be the main reason for other contenders dropping from the race.

 

With the purchase of a 65.12% stake from BG Group, new owner GSPC would have to come up with a mandatory 26% open offer for minority share holders. Nomura says that most of the minority shareholders may opt to tender their shares. Current regulatory uncertainties, exit of BG Group (with high standards of corporate governance) as a promoter, and limited growth opportunities in current operating areas of Gujarat Gas are the reasons, according to Nomura, for minority shareholders to opt to tender their shares.

 

The open offer may lead to GSPC eventually acquiring more than a 90% stake and possible delisting of Gujarat Gas. In Nomura’s view, it would also make strategic sense for the GSPC Group to merge Gujarat Gas with its existing city gas distribution entity GSPC Gas, which also operates in Gujarat.

 

Nomura Equity Research expects the Gujarat Gas stock to correct to deal valuation levels. Mandatory open offer of 26% would also happen close to the deal price. Low deal valuation reflects increased regulatory uncertainty and declined investors’ interest.

 

The increased regulatory uncertainties, post PNGRB’s (Petroleum and Natural Gas Regulatory Board) severe tariff order for Indraprastha Gas, and the fact that most other bidders lost interest (of six to seven bidders only GSPC remained in the fray) are the key reasons for lower deal valuation, in Nomura’s view. Nomura adds that having made its intention to exit Gujarat Gas public, the BG Group did not want to prolong the process and agreed on a somewhat depressed deal valuation.

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