After months of will-it, won’t-it, BG Group finally decided to sell its majority 65.12 per cent stake in city gas distributor Gujarat Gas to the Gujarat-government controlled GSPC. At Rs 295 a share, the sale consideration works out to around Rs 2,460 crore. This is considerably lower than what was expected in November last year when news about the BG Group’s plans to exit Gujarat Gas started doing the rounds. The stock price then was above Rs 400.
The BG Group may not have got the price it hoped for initially, but it still has made a tidy profit on its investment. It purchased this stake in 1997 for Rs 170 crore. At Rs 2,464 crore, the investment has grown 14.5 times in 15 years – a compounded annual growth of 19.5 per cent.
Why the low price
What explains the lower price? Gujarat Gas’s recent financial performance could be a reason. Profits fell sharply due to increasing dependence on costlier imported gas, rupee depreciation, weak volume growth, and an inability (despite price hikes) to fully pass through cost increases.
Many of the reported buyers including GAIL are said to have backed out citing high price. Then came the upstream regulator PNGRB’s move to significantly slash the tariffs of Delhi-based city gas distributor Indraprastha Gas. This had a telling effect on the stock prices of most natural gas companies including Gujarat Gas. With the high bids not materialising, the GSPC-led consortium alone was left in the fray.
Good deal for GSPC
GSPC seems to have struck a good bargain for a prized asset. GSPC Gas is already the largest city gas distributor in the country and the Gujarat Gas buy further consolidates GSPC’s position. Gujarat, in which both operate, has the most extensive gas network in the country. The two companies will complement each other instead of eating into individual markets. At 17 times trailing twelve month earnings, GSPC’s buying price of Rs 295 a share may seem expensive. But the trailing earnings are depressed owing to an abnormally weak December 2011 quarter.
Open offer
The GSPC-led consortium has announced an open offer to acquire an additional 26 per cent stake from the public shareholders of Gujarat Gas at Rs 314.17 a share. With public shareholders holding around 35 per cent stake, the acceptance ratio should be at least 75 per cent.
But after the open offer, GSPC will hold more than 91 per cent in Gujarat Gas. It will then either have to delist Gujarat Gas or reduce its shareholding in the company to 75 per cent (as per SEBI rules) by issuing shares to the public.