Starting today, BG Group plc, along with its advisor Citibank, is initiating one-on-one negotiations with potential suitors shortlisted for its 65.12 per cent stake in Gujarat Gas Company (GGCL), the country’s largest natural gas distributor by sales. But UK-based BG may have to bargain hard as so far, after the first round, most players have not offered to pay a premium for the controlling stake.
According to sources involved in the negotiations, around eight bidding groups have been selected after they submitted non-binding bids earlier this month. Among those to have so far made the cut are Adani Group, Torrent Power, Germany’s E.On, a PSU consortium of BPCL, Gujarat State Petroleum Corporation (GSPC) and ONGC besides two large global private-equity players. There is a “surprise” bidder, too, but its identity could not be independently verified. Oil India is also likely to join the PSU consortium.
However BG’s expectation to raise more than Rs 3,150 crore ($600 million) through this divestment process may come a cropper, as sources said most of the bids have come in the Rs 350/share-Rs 400/share range — either at a discount to the prevailing market price or at par.
A GSPC official said the data room would be opened for a second time on Monday. “So far, around eight bidders have participated in the process. The bids have come in between Rs 390-400 per share.”
| THE SURPRISE ANGLE |
| * Eight bidding groups selected after they submitted non-binding bids in early Jan |
| * They include Adani Group, Torrent Power, Germany’s E.On, a PSU consortium of BPCL, GSPC, ONGC, 2 large global private-equity players |
| * A “surprise” bidder too exists, Oil India likely to join PSU consortium |
| * Bidders have ‘fundamental concerns’ about GGCL, leading to a valuation mismatch |
| * GGCL serves 325,000 customers through a 3,850 km pipeline network in Gujarat |
Friday’s closing price for the stock was Rs 385.15/share at the BSE, down nearly 14 per cent from its three-month high of Rs 448.8/share. Interestingly that coincided with the time when BG first made public its intention to exit the company.
“BG’s expectations are very high,” according to a senior official from one of the bidding companies. “Considering one has to do an open offer after buying out BG, the negotiations should be quite intense.” BG officials were not available for comment.
Bidders are believed to have some fundamental concerns about the company which is also adding to their conservatism, leading to the valuation mismatch.
The first is the geographical spread of its operations. Despite the head start, it is still a Gujarat player -- and most believe it desperately needs to go beyond one state. Its expansion, too, has been modest with recent disappointments. Proposals to lay pipelines for Bhavnagar, Jamnagar, Kutch East and West have been stuck with the central regulator, Petroleum and Natural Gas Regulatory Board. Even similar proposals for Saurashtra, North and Central Gujarat which are today devoid of natural gas are going nowhere.
Currently, Gujarat Gas serves about 325,000 residential, commercial and industrial customers through a pipeline network of about 3,850 km in the state. It covers cities and industrial districts like Ahmedabad, Surat, Ankleshwar and Bharuch, distributing around 3.5 mmscmd of natural gas.
Despite the infrastructure, potential bidders are concerned about gas availability which is believed to be a major challenge. Supplies from its principal source — the Panna-Mukta-Tapti fields — have reduced by 50 per cent since 2008. Incidentally, BG (founded in 1997 after the demerger of Centrica) is the joint operator of these fields along with its JV partners ONGC and RIL. “The company has to rely on LNG (liquefied natural gas) which is expensive,” notes an investment banker involved in the process. “So, sustaining its profitability has been a challenge. Many believe BG Group is planning to exit since maintaining supplies is becoming a concern.” Even the company’s management acknowledges this.
With its supply in place from BG till 2013 and from Panna Mukta till 2019, some of the bidders feel the company could remain vulnerable to supply shocks.
Some of the bidders also seemed to be concerned about potential labour issues as there are two unions in the company. Such issues are typically not associated with the state, known for attracting big-ticket investments. But some of the recent labour unrests in Gujarat have made some wary. There are positives too. For the nine months ending September 2011, the company (it follows January-December calendar) posted Rs 249 crore net profit, an increase of 41.5 per cent over the corresponding period in 2010. On an annualised basis, it is expected to be around Rs 332 crore.
With inputs from Rutam Vora from Ahmedabad
BG, which describes itself as a key operator in the gas industry in India, has had a controlling stake in GGCL since 1997. However, BG seems to on an exit mode from many of its India investments.
