PSUs lead the charge for BG stake in Gujarat Gas

The countdown for BG's stake sale in Gujarat Gas Company (GGCL) begins tomorrow. Three months after BG made its intention of divesting its stake clear, over half a dozen potential bidders are likely to submit non-binding bids for BG's 65.12 per cent stake in the country's largest natural gas distributor by sales.

According to people in the know, Adani Group, Gujarat State Petroleum Company (GSPC), GAIL, the country's leading gas transmission and marketing company, IOC, HPCL and BPCL are set to submit their initial bids. Joining them could be India's largest private sector refiner Reliance Industries.

Most analysts, however, are sceptical about the premium BG is expecting for the controlling stake in the company. Investment banking sources said BG was planning to raise Rs 3,150 crore ($600 million) through this divestment process.

The high valuation expectation may force some of the PSUs to subsequently form consortia, when final bids will be due.

"As of now, we are bidding solo but we are keeping all options open for teaming up. We have informed everybody about such a possibility," said a senior HPCL official. A BPCL official said on condition of anonymity, "The company offers ready-made infrastructure and that makes it an attractive opportunity."

HPCL and BPCL are present in various city gas projects only via joint ventures. But, both have been exploring solo forays. An IndianOil official also said it was an interesting city gas venture to bid for.

IOC has existing franchise agreements with several city gas distribution (CGD) players to market compressed natural gas through its retail outlets. Green Gas Ltd, IndianOil's joint venture with GAIL (India), is already operational in Agra and Lucknow in Uttar Pradesh and is expanding to cater to increased demand in various sectors.

"Most state-run companies are flush with cash to weigh an option like that of Gujarat Gas. At present, though, a weak rupee has already hit gas retailers," said a Mumbai-based analyst.

Officially, however, none of the companies wanted to make a statement ahead of the last date, considering the sensitivity of the issue. An RIL spokesperson denied the company's interest and said, "We are not submitting any bid for Gujarat Gas."

Despite its initial reluctance,

Adani Group is also going ahead with a solo bid.

BG has roped in Citigroup to advise on the potential stake sale.

"BG is expecting close to Rs 4,000 crore (Rs 40 billion) for control. That's a 25 per cent premium to the current market cap of the company. Some players may find it too expensive," said an energy analyst following the development.

For the nine months ended September 2011, the company posted Rs 249 crore (Rs 2.49 billion) net profit, an increase of 41.5 per cent over the corresponding period in 2010.  On an annualised basis, it is expected to be around Rs 332 crore (Rs 3.32 billion). The company follows a January-December calendar.

BG describes itself as a key operator in the gas industry in India, and has had a controlling stake in Gujarat Gas since 1997.

Gujarat Gas serves about 325,000 residential, commercial and industrial customers through a pipeline network of about 3,850 km in the state. It covers key cities and industrial districts like Ahmedabad, Surat, Ankleshwar and Bharuch.

Close to 65 per cent of Gujarat Gas's current volumes of 3.4 million standard cubic metres per day (mscmd) are tied up till 2018, providing some visibility. Of the remaining, it has a tie-up to source one mscmd of gas from BG till December.

Gujarat Gas should also gain from the Delhi-Mumbai Industrial Corridor (DMIC) project, which will boost fuel as well as power demand in Gujarat (38 per cent of DMIC passes through Gujarat).

Analysts say even if there is a temporary blip in supplies, the company can source from the market, and higher costs (if any) can be passed to consumers.

BG also owns 49.8 per cent stake in Mahanagar Gas in India, the country's largest city gas distribution company by customer base. But, as of now, it is holding on to that investment.

However, sources say, depending on the final bids, the company will take a call if it will exit entirely or only divest a partial stake. Oil industry officials insist the latter seems unlikely.

BG has already exited from all but one exploration asset in the country.

It is left with just one exploration block in the Krishna Godavari basin and has 30 per cent interest in Panna Mukta and Tapti oil and gas field, where ONGC has 40 per cent stake and Reliance Industries has the residual 30 per cent.

Gujarat Gas shares on Monday closed marginally up at Rs 383.25.