The offer from the Essar Group to buy-out minority shareholders of Essar Oil and Essar Steel may be an indication that the group has decided to sell out its stake in Hutchison Essar. By Rex Mathew

 The Essar Group, controlled by the Ruia brothers, has announced its intention to acquire the minority shareholders in listed group companies Essar Oil and Essar Steel and take these companies private. If the minority shareholders accept the offer, shares of both the companies would be de-listed from the stock exchanges.

This is one of the biggest ever offers by a promoter group to buy out minority shareholders in India. Most of the earlier instances have been foreign parents offering to buy out domestic shareholders of Indian subsidiaries. The most recent of such offers was by Oracle to take i-Flex Solutions private and there is speculation that Standard & Poor's may make a similar offer for Crisil.

The actual buy-out would not require substantial funds as the Essar Group already owns most of both companies. The group has a 87.96-per cent stake in Essar Oil which has a market capitalisation of Rs7,225 crore at today's closing levels. Essar holds a 87.09 per cent stake in Essar Steel which is currently valued at Rs5,739 crore. Even if the final offer price is 20 per cent above current valuations, the Essar Group would require less than Rs2,000 crore to buy out minority shareholders in both the companies.

Promoters decide to take their listed companies private when they feel the stock market is not valuing the businesses correctly or when their status as publicly listed companies limits management flexibility. However, it is not very often that promoters decide to de-list companies with large expansion plans operating in capital intensive sectors like oil and gas and steel.

Both Essar Steel and Essar Oil have very large expansion plans, which would involve billions of dollars in investments over the next few years. Just last week, the Essar Group had stated its intention to raise the refining capacity of Essar Oil to 30-million tonnes per annum from the current 10.5 millions. The company is also interested in expanding its upstream business of oil and gas exploration. Essar Steel, which currently operates a 3-million tonne steel plant, has plans to set up new integrated steel mills.

Fund raising options for privately held companies are limited when compared to listed companies. True, they can easily raise debt as long as the asset base of the companies is good enough. They can also raise part of the equity component from private equity investors or strategic investors by selling minority stakes. But such investors who would hold substantial stakes can be much more intrusive and more difficult to manage than public shareholders.

If the Essar Ggroup is not reasonably confident of finding sufficient finances on its own to fund the expansion plans of both Essar Oil and Essar Steel, it would not have considered this move. What gives it the confidence is its 33-per cent stake in Hutch-Essar, which, in all probability, it has already decided to sell to the highest bidder.

Though the Group had expressed its interest in acquiring the remaining 67- per cent stake in Hutch-Essar from Hutchison and has reportedly submitted a $14 billion bid, most industry observers were of the opinion that this was a gamble on the part of Essar to push up the price to get the best possible realisation for its own stake.

In any case, it would be very difficult for the group to take Essar Oil and Essar Steel private and acquire Hutch-Essar at the same time as it would be nearly impossible to finance all the deals on its own. To acquire Hutchison's stake in Hutch-Essar, it would need close to $14 billion at the enterprise value of $21 billion indicated by Hutchison. Add to that the amounts required by Essar Oil and Essar Steel for their expansion, which would be far beyond the fund raising capability of the group.

Selling its stake in Hutch-Essar may fetch the group around $7 billion or around Rs31,000 crore at the current indicated valuations. Even after paying off all the debt availed to build the 33-per cent stake in Hutch-Essar and buying out minority shareholders in Essar Steel and Essar Oil, the group would be left with sufficient funds to finance the expansion plans in steel and oil.

This indicates that the Essar Group will announce its exit from Hutchison Essar in the near future.