The amalgamation of Gujarat Gas Company (GGCL) with the city gas distribution business of Gujarat State Petroleum Corporation (GSPC) may impact the shareholders of the former , in the near-term.

However, in the long run, the merged entity, which will control 80 per cent of the city gas market in Gujarat, may open new opportunities for investors, according to analysts.

On Tuesday, Gujarat Gas announced the details of the proposed amalgamation with the Gujarat Government promoted GSPC Networks Ltd (GDNL).

GDNL is a special purpose vehicle created by GSPC Gas, its associate Gujarat State Petronet Ltd (GSPL) and other State-owned companies to acquire 74 per cent share holding (from British Gas) in listed Gujarat Gas.

GSPC Gas is the city gas arm of GSPC group. GSPL is a listed entity operating gas transmission network.

GDNL’s share capital will be restructured, followed by merger of GSPC Gas and Gujarat Gas with GDNL. The existing shareholders of Gujarat Gas will get shares of the new GDNL in 1:1 ratio.

The amalgamation is planned in a manner so that the existing public shareholders of GGCL will continue to hold 25 per cent in merged GDNL.

In an advisory to its clients, JM Financial estimated the fair value of GDNL shares (post merger) at ₹203-244 a share. This is lower than the existing GGCL share price of ₹390.60.

“Overall, we believe that for Gujarat Gas shareholders, the merger is positive in the long-term… However, in the short term, there could be some concern due to the high debt and overall valuation of GSPC Gas,” the merchant banker said.

The merger is expected to be “neutral” for GSPL shareholders. GSPL will control 25 per cent interest in the merged GDNL.

The short-term concern (for GGCL shareholders) arises from two counts. First, GSPC group has borrowed over ₹2,000 crore to finance the acquisition. The debt will be passed over to the amalgamated GDNL.

Moreover, while Gujarat Gas posted nearly ₹370 crore profit on a turnover of over ₹3,000 crore during January-December 2013, GSPC Gas made a loss of approximately ₹57 crore during the same period.

It means, in the near-term, Gujarat Gas will be solely responsible for servicing the debt as well as generating profits for the merged GDNL.

But, the scenario may change in the long run, riding on aggressive expansion plan of GSPC group paving way for higher volumes and increased bargaining power in sourcing LNG at optimum cost.

As on date, GSPC and GGCL together distribute over 7 million metric standard cubic metre of gas every day. The volume will increase with the scheduled expansion of merged entity in three more districts.

Also the merger is expected to reduce the cost per employee through redeployment of resources.

(This article was published on April 29, 2014)
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