If there is one thing the Essar Group’s Ruias have mastered, it is the art of building world-class assets and then exiting at a premium valuation. After having placed their bets on key sectors such as telecom, real estate and energy in the early 1990s, just when the Indian economy was opening up, the Ruias have reaped windfall gains from selling some of these businesses over the last few years.
The $12.9-billion deal to sell the oil unit to Rosneft and other investors is the highest ever FDI inflow into the country. Though most of this will be used to reduce Essar Group’s debt, it gives the Ruias more breathing space to focus on other existing businesses, and perhaps look for newer opportunities.
We’ve been talking about this for the last six months. The call which we took as a family, we felt that there was an attractive valuation available. If you think about our group’s philosophy, in most of our companies we hold 100 per cent or have a very high shareholding. The option here would have been to be a minority shareholder, which is not necessarily our philosophy. We decided to monetise the business, the other option.
How difficult is it to exit a business that you have nurtured for two decades?
Any business that you build and then monetise, there is an emotional connect because there is passion. But at the end of the day, our philosophy is in building the business, nurturing it, creating scale and then monetising it. There are many other businesses in our portfolio which have similar opportunities and that is what we will focus on now.
Why is it that Indian entrepreneurs don’t stay invested and build global brands?
I don’t know about the others but in our case, one of our key skill sets is in building greenfield businesses. The ‘Make in India’ theme fits in very well with what we are as a group.
Global companies that want to come to India, for them to build an asset here, go through the time and effort it takes here, they are probably less keen on that and prefer investing in assets that are operational. It’s good for Indian entrepreneurs to be building these businesses, making these investments, because they understand the local conditions and domestic markets the best.
If the steel business hadn’t run into debt, would you have sold your oil unit?
The two are totally independent of each other. We look at businesses to create value and monetise them at the right time and this was not driven by the problems we were facing with steel.
Are there more assets you would like to spin off?
No, I think we’re good for now.
How much does your debt come down with this deal?
Debt is coming off at two levels. The operating company — all the debt associated with Essar Oil, the power plant and the port, all the debt associated with it will move out, which is approximately $5 billion.
We will also pay off substantially most of the debt at the holding company, which is also approximately $5 billion. We’re de-leveraging the holding company to a large extent and the rest we’re using for investments that we need in some of the other businesses, principally in the steel business, and also for some of the correction of the working capital in Essar Oil. This will be the largest de-leveraging.
These are the companies that the earlier generation, Ravi and Shashi Ruia, placed their bets on. Where are Prashant Ruia’s bets?
We still have five other companies in the portfolio and all of them have very large potential in India. We’ve gone through a period in the last 4-5 years where the investment cycle in these businesses has slowed down considerably. It’s going to turn, it has to turn and it will turn. Because our capacity is still very low in these sectors compared to what India needs.
Also, commodity prices are getting corrected in a big way. Our goal is to focus on the sectors we know and grow them. There are lots of exciting new opportunities outside, but we will look at them when the time is right.
You’ve also allowed the new owners of the oil business to use the Essar brand. Is there a fee you will earn?
We’ve agreed to allow them to have access to the brand for a while. How long it will be is for them to decide.
Will you get a non-compete fee for the refining business?
There are non-compete obligations for a certain period of time, but there is no fee from this. We think they should get the full value of the business.
Your interests in the oil sector remain?
We still have the refinery in the UK and the exploration and production business, which is not part of this transaction.
What about the employees of Essar Oil?
If someone is coming in to acquire a company, it doesn’t impact the people much. I don’t think there will be significant change in the management — even the top-level will continue.
They are looking to grow the business, so they’ll be needing more people, not less. The reason they are investing is because they are happy with the asset and the management team.
What is your outlook for the steel business?
Essar Steel went through a period created by circumstances which had nothing to do with the company. And in the intervening three years, we paid nearly ₹15,000 crore in interest to the banks.
Now that period is behind us, and in the last one year there has been a significant pick-up in the company and operations. We’re working with the government for solutions and it has come up with new guidelines, like the S4A, which allows such problems to be addressed. And we’re going to do that.
As the opportunities for growth come up, with the steel business we want to take the plant from current capacity utilisation to 90-95 per cent in the next couple of quarters.
In the power business, the focus is to get all the plants fully operational.
Do you think you have been unfair to your minority shareholders?
I think we’ve been more than fair for two reasons: the value at which the delisting took place was at nearly a 300 per cent premium to the share price before the deal was announced. That is ₹20,000 crore of value.
More importantly, we also committed to SEBI that if we get a higher valuation for the shares, then we would give the difference to the minority shareholders.
I don’t think that has ever been done in the history of India. We volunteered this to SEBI. Minority shareholders will do just as well as us.
We believe there will be an upside, but the exact number is not known now.