Rosneft, Essar meet to expedite $2.8-bn deal

Industry:    September, 2016

In a bid to expedite Rosneft’s acquisition of 49 per cent stake in Essar Oil, the legal teams of the Ruias of Essar Group and Russian oil major Rosneft are meeting later this week to sort out issues raised by Indian banks on the impact of US sanctions on Russian companies.

The meeting will try to find solutions, including tinkering of the structure of the deal, on how the transaction can be fast-tracked, given Indian banks are apprehensive their exposure in Rosneft-owned Essar Oil could jeopardise their investments in the US and in the European Union. Indian banks have Rs 27,000 crore of debt exposure to Essar Oil. “Both parties are confident that any deal they broker will have to be sanction-compliant and are confident the final structure will achieve that objective fully,” said a source close to the development.

The US had imposed economic sanctions on Russia after the latter took over the Crimean region of Ukraine in 2014. These sanctions bar any business relations with Russian companies with outside firms. This had made Indian banks wary of giving their clearance to the deal.

A lawyer close to the development said the sanctions would be triggered only if Rosneft buys more than 50 per cent stake in Essar Oil. “Since Rosneft’s stake is below 50 per cent, the US sanctions would not impact Indian banks. The lawyers would discuss arguments on how the Essar-Rosneft deal will not negatively impact Indian banks,” he added. The managements of both Essar Oil and Rosneft are trying to close the deal by October this year, given it was initially signed in July last year.
When contacted, an Essar Oil spokesperson declined to comment.

Apart from selling 49 per cent stake to Rosneft at a conservative valuation of $2.8 billion (approx.) in cash, the Ruias also plan to sell an additional 25 percent to commodity trader Trafigura Group, thus, reducing them to minority shareholders. The enterprise valuation of the company is pegged at around $12 billion.

The meeting comes in the backdrop of reports that Russian lender VTB Bank is in talks to buy Essar Global’s loans worth $3.5 billion from Standard Chartered Bank, ICICI Bank, and Axis Bank. VTB Bank chief executive officer Andrey Kostin told Bloomberg it is in talks with the three banks to take over their loans. The money received from Rosneft will be used to repay loans of promoter companies.

The Ruias initiated the sale of its profit-making refinery in Vadinar, Gujarat, in order to repay loans of both Indian and foreign lenders. In mid-August, a Rosneft official had confirmed the work on the transaction was in progress with Essar Group. “We are negotiating with our Indian partners. The guidance we have provided, in terms of our intention to go into that transaction, remains unchanged. But negotiations continue and we will be keeping the markets informed, as we need to make additional disclosures,” a spokesperson had said.

Analysts said the transaction is important to both the Ruias and Rosneft. The transaction would help the Essar Group reduce its debt, which has crossed Rs 88,000 crore as of March this year.

At the same time, Rosneft would be able to sell its crude produced in Russia to Essar Oil in India and then market it to Indian customers. The deal is also good for Rosneft, as Essar Oil is expecting to make Rs 10,000 crore of Ebitda (earnings before interest, tax, depreciation and amortisation) in the financial year ending March next year, from Rs 7,000 crore it earned as of March this year.


Jul 2015: Essar Oil announces sale of 49% stake to Rosneft

Dec 2015: Essar Oil delisted from Indian stock markets

Mar 2016: Essar Oil misses deadline to close $2.8-bn deal

Aug 2016: Indian banks raise red flags over US sanctions against Russian companies

Sep 2016: Essar Global initiates talks with VTB Bank to take over $3.5 bn loans, targets closure of deal by October.


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