Date:29/06/2005 URL: http://www.thehindubusinessline.com/2005/06/29/stories/2005062901700900.htm

Back Govt asks IOC to seek second opinion on IBP merger swap ratio

Richa Mishra

New Delhi , June 28

IBP Co Ltd may have to wait for a little while before it is formally merged with Indian Oil Corporation Ltd.

The Government has asked IOC to seek a second opinion on the swap ratio for the proposed merger.

The Finance Ministry had raised questions about the swap ratio, saying it was not favourable to the Government.

Official sources told Business Line that the Petroleum Ministry, which has been examining the issues raised by the Finance Ministry, has asked IOC to take views from another independent valuator on the proposal. Meanwhile, the Ministry has also responded to the Finance Ministry.

The proposal for the merger of IBP with IOC, which had been approved by the board of directors of the two companies, based on in-principle approval of the Ministry of Petroleum and Natural Gas, was awaiting the Government approval. A relative valuation of equity shares on behalf of IOC and IBP had been carried out, and the boards of both the companies had recommended a swap ratio of 125 shares of IOC for every 100 IBP shares.

The timeframe for the implementation of the merger is expected to be five to six months from receiving the Government approval.

Officials in the Petroleum Ministry said the Government would like to take a long-term view on the issue. The nodal Ministry had circulated the proposal of a swap ratio of 1:1.25 to other ministries for their views before taking it to the Cabinet Committee on Economic Affairs (CCEA).

Questions had been raised on the valuation mechanism. The Finance Ministry also said IBP was overvalued in the merger and that it would result in a loss in the Government stake in IOC following the merger. Sources agreed that IBP's share value had come down as marketing companies were reeling under the impact of a highly volatile international oil market.

Currently, the Government's stake in IOC is 82.03 per cent with the remaining being held by public, financial institutions and foreign institutional investors. At the end of March 2005, IOC held a 53.58-per cent stake in IBP with FIIs, banks, mutual funds and the public holding the rest. Only after getting the CCEA nod, the Company Law Board will be approached for granting legal sanctity to the proposal.

IBP has a strong retail brand value. This retail brand identity will be maintained post-merger. The merger is expected to further strengthen IBP's retail presence, and the synergy and rationalisation of operations post merger will help both IOC and IBP reduce operating costs, and help enhance shareholder value.

IBP reported a 73-per cent dip in net profits for 2004-05, at Rs 58.87 crore, against Rs 214.66 crore during the corresponding period last year. According to its Chairman, Mr Sarthak Behuria, the reduction in net profit was mainly due to under-recoveries of Rs 352 crore in kerosene and LPG and Rs 211 crore in motor spirit and diesel.