Deep Industries demerges oil & gas service business

Deep Industries Ltd (Deep) is a listed public company primarily in two business segments:

(a) Oil and Gas Services Business comprising of air and natural gas compression services, gas dehydration, work over and drilling rig services and

(b) Oil and gas exploration and production.

Deep CH4 Private Limited (Deep CH4) is a promoter group company. At present, the company does not have any operating business.

TRANSACTION

Deep Industries (Demerged Company) will demerger its Oil and Gas Service business to Deep CH4 (Resultant Company). All Services business assets i.e. Rigs, Gas compressors Packages, Gas Dehydration Packages, employees with technical competence, existing contracts, other requisite assets & liabilities relating to services business shall be transferred to new entity

• Appointed date for the transaction is April 1, 2017.
• Share exchange ratio is 1 (one) fully paid up equity share of Rs. 10 each of the Resulting Company for every 1 (one) equity share of the Demerged Company.

Accounting Treatment

The demerged company will reduce the carrying amount of assets and liabilities pertaining to the Oil and Gas Service Undertaking from its book and Resulting Company will record it on same amount. The resulting company’s shares are to be issued at a premium of Rs 290 per share, which gives undertaking a valuation of Rs. 960 crore (3.5 times more than current valuation of the company)

Shareholding Pattern

Existing equity share capital of Deep CH4 will be cancelled pursuant to the scheme by paying the amount equivalent to the face value. There will not be any changes in the shareholding pattern of Deep Industries post demerger. Post-demerger shareholding pattern of Deep CH4 will be mirror image of Deep Industries.

Earlier Transactions

In 2015, all the promoter entities (through which promoter was holding stake in Deep) got merged into Deep. As a result of merger, promoters got direct holding in Deep.

In December 16, Deep Industries has raised INR 63.8 crore funding from QIB’s. The promoter’s stake came down by 6.13%.

Financials

Table 1: As on 31.03.2018 (All Figs in INR crore)

Currently, all the turnover of the Deep is from Oil & gas Services Undertaking.

Our View

The transaction will result in housing of active exploration and production and in separate entities. This can be beneficial for attracting strategic investors in future. However, there are certain points on which the company should provide explanation. Recently three directors (including whole time & independent) resigned due to personal reasons. Also, the reason for keeping such prior appointed date being April 1, 2017 is not clear and could create a regulatory hurdle.