Essar Oil -Delisting Idea Not Worthy a Miss

NameReco DateCMPTargetProspero RatingReport Date*
Essar Oil25Jun2014107Rs. 130-160Rs. 14025Jun2014

A) Delisting Idea: We recommend buying Essar Oil at Rs 107-108 based on the delisting offer proposed by the promoter of Essar Oil i.e Essar Energy.

B) Company background: Essar Energy, the parent of Essar Oil was listed in London Stock Exchange and recently successfully delisted from the London stock exchange. As the group plans to take the energy business private, Essar Energy has now proposed to delist its Indian operations i.e. Essar Oil. Based on our calculations, the floor price of Essar Oil will be Rs 108. This means that Essar Oil stock is available at almost same price as floor price.

This is a pure arbitrage opportunity with an extremely low risk and a high chance of substantial gains. We expect that the delisting for Essar Oil will happen at a substantial premium to its floor price and should not take more than 5 months. Essar Oil Delisting offer was proposed by promoters on 20.June.2014 and the board has recorded the same. The shareholders approval for the same will be sought for in the coming days.

C) Share holding pattern:

Promoter: 72.47% (360929673)

Public: 27.53% (137123373)

Total: 100% (498053046)

A minimum of 90% of shares are required to delist the company. So the promoter needs to acquire another 17.53% (87308698) shares from public shareholders.

We think that the delisting will happen at a premium because: 

1. Indian companies have a track record of delisting their companies successfully and at a decent premium to the floor price. Refer the table below to understand the same.

2. Reforms in Oil & Gas Sector: Diesel prices are now nearly being set at the market price mechanism. The entire subsidy will vanish and this will pave way for private sector companies to open and expand own retail outlets. The overall reforms in this sector will also mean that there could be large Oil companies getting interested in buying stake in Essar Oil at a significantly higher premium. This is enough a motive for Essar group to complete the delisting offer, even though at a small premium.

D) Key risks:

The Company might not get delisted due to following reasons:

1) The discovered price under reverse book building system is too high and not acceptable to the promoter OR

2) The promoter do not receive the mandatory minimum number of shares required to delist the company

In such a case, the price can see a sharp fall if delisting doesn’t go through.

E) Stock Performance:

Note: Our current recommendation is a Strong Buy in Essar Oil as it is a classic case of —- “Heads, I win; Tails, I do not lose much”. This kind of recommendations is mainly for investors having large pool of funds and who want to participate

* Report Date may sometimes be different from Recommended Date.

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