Oil minister Dharmendra Pradhan on Monday announced that Oil and Natural Gas Corporation (ONGC) merger with Hindustan Petroleum Corp (HPCL) will be completed in the current financial year.
He added the Cabinet Committee on Economic Affairs (CCEA) has approved the setting up of a special ministerial panel headed by Finance Minister Arun Jaitley which will oversee and expediate the merger process.
“The proposed acquisition in the oil sector will create a vertically integrated public sector ‘Oil Major’ company having presence across the entire value chain. This will give ONGC an enhanced capacity to bear higher risks, take higher investment decisions and to neutralise the impact of global crude oil price volatility. The acquisition of HPCL by ONGC will result in significant synergies in terms of optimisation of logistics costs, R&D activities, economies of scale of purchase of crude oil and optimization in refinery operations,” Pradhan said in Parliament on Monday.
He added for overseeing this transaction, CCEA approved setting up of an alternative mechanism, headed by the Finance Minister, which will help in taking quick decision with regard to the timing, price, terms and conditions and other related issues to the transactions.
Also, the Department of Investment & Public Asset Management (DIPAM) has invited bids by August 10 from investment bankers and legal advisers who are expected to advise the government on the valuation of HPCL and ‘professionally guide during the negotiation with ONGC,’ according to an advertisement published on DIPAM site.
According to senior ministry officials, the merger will not have an impact on HPCL’s cultural and corporate identity, which will remain distinct from ONGC. The deal which is expected to cost ONGC around Rs 30,000 crore, according to HPCL’s current market valuation, will be given the final nod by the Union Cabinet only after a clear process for the merger is determined.
The recent flurry of activity to integrate government-owned Oil Marketing Companies (OMCs) with oil and gas exploration companies follows Finance Minister Arun Jaitely’s announcement during the 2017-2018 budget speech on the government’s plan to create an integrated public sector ‘Oil Major’ rivalling international and domestic private sector oil and gas companies.
Ambit Capital, an equity research firm in its recent report stated that the merger would not bring much synergy benefits to the two companies and on the contrary will result in the weakening of high-performance culture at the target company. Also, ratings agency ICRA, in its note released last week on the merger, stated that the transaction could affect the financial strength of ONGC for future large acquisitions and capex programmes. It added that ONGC may face several challenges related to integration and probable delay in decision-making due to multiple hierarchies as a result of the merger.
The government, after the ONGC-HPCL merger, reportedly plans to embark upon divesting its 66 percent stake in upstream oil and gas company Oil India to Indian Oil Corporation (IOC) India’s largest fuel retailer.