IOC-CPCL merger still hangs fire
New Delhi   06-Oct-2010

Five years after the government of India and the oil ministry had cleared the plans to merge standalone refineries with public sector oil market companies (OMCs), the proposed merger of the Chennai Petroleum Corporation Ltd (CPCL) and the IndianOil (IOC) has been hanging fire as National Iranian Oil Company (NIOC), which is a significant minority stakeholder in the company, has been refusing to bite the share swap bate offered by IOC in return for NIOC's stake in CPCL.

The government had offered to swap NIOC's stake in CPCL with IOC shares based on a `fair value' to be arrived by an independent consultant. NIOC, however, is not in favour of the share swap deal as it fears `unfavourable valuations' considering the financials of both the companies. Sources in the know told FE that little progress has been made in the talks between the two sides even after five years in the case of a possible sell off by the Iranian company in the Chennai-based public sector standalone refiner. “There has been little progress in the talks between the two sides. The major issue is the question of valuations. IOC may have to sweeten the offer that may fit the Iranian company's expectations”, a source close to the talks told FE.

Analysts feel that NIOC is still worried about the low valuation in case of a share swap deal with IOC since CPCL has the financial ratios working in its favour. “Being a standalone refiner, CPCL does not have to foot in the subsidy bill, where as IOC still have to shoulder the subsidy burden to a greater extent. However, things may change once the decontrol of petroleum products prices really pans out. The government would have to give a facelift to the IOC balance sheet before its proposed 10% stake sale in the company”, sources said. IOC is also planning to come out with a follow on public offer (FPO) of 10% of its expanded capital some time next year.

According to analysts, while IOC had a price to earning ratio (P/E ratio) of 7.42 and a market capitalisation to slaes ratio of 0.25 as of quarter ending March this fiscal, CPCL had a P/E ratio of 7.67 and a market capitalisation to sales ratio of 0.15.

The Government, way back in 2005, had decided to merge the standalone refineries with OMCs to pare the latter's losses stemming out from under-recoveries. Following this, BPCL had merged the Kochi Refineries Ltd (KRL), the other standalone refinery in the South, with itself, IOC had merged the Kolkotta-based Bongaigaon Refinery and Petrochemicals Ltd (BRPL) with itself late last year. However, IOC's plan to merge CPCL has been in limbo since then as NIOC is in no mood to exit CPCL. While IOC holds 51.895 stake in CPCL, NIOC has a decisive 15.40% stake in the standalone refiner and the first right of refusal.