French petroleum refining company, Total S.A., decision to acquire 37.4% stake worth Rs 5,700 crore in Adani Gas has crossed the major regulatory hurdle.
India’s stock markets regulator SEBI has allowed Total to proceed with making an open offer to Adani Gas minority shareholders.
In October, Total announced its decision to acquire a stake in city gas distributor Adani Gas.
This acquisition was to be done in two steps — first through a tender offer to public shareholders to acquire up to 25.2% of shares at Rs 149.63 a share aggregating to Rs 4,146 crore and then through the purchase of the residual shares from the Adani family.
As of September 2019, the promoter group, ie, the Adani family, owns a 74.8% stake in Adani Gas, and public shareholders own the remaining 25.2%.
According to a press release, the Adani family and Total ultimately shall hold 37.4% each, and public shareholders shall hold the remaining 25.2%.
This means that whatever Total buys from the public will be reinstated by the Adani family from its excess stake (beyond the 37.4% it is supposed to hold) through an offer for sale (OFS) to maintain the public shareholding at 25.2%.
Since its listing in November 2018 at Rs.72 a share, the Adani Gas stock has had a runaway rally — more than doubling to Rs 151 now.
Compared with its peers in the city gas distribution (CGD) business, Adani Gas listed at a valuation premium that has only widened sharply since then.
At the current price level, the Adani Gas stock trades at about 66 times its trailing 12-month earnings, far higher than that of peers such as Indraprastha Gas (31 times), Mahanagar Gas (16 times) and Gujarat Gas (29 times).
Adani Gas has strong business prospects, as reflected in its declared results for the year ended March 2019 and the two-quarters of the current fiscal.
Adani Gas operates in five geographical areas (GAs), including Ahmedabad, Faridabad, and Vadodara. It struck big in the ninth and 10th round of CGD bids, winning 14 GAs.
Adani Gas also has a joint venture with Indian Oil that operates in eight GAs and has won bids for 11 GAs. In all, Adani Gas has a presence in 38 GAs — 13 operational and 25 bids won.
The company plans to invest about Rs 10,000 crore in the CGD business over the next eight years. While Adani Gas is well-positioned, growth from the new GAs will take a few years to pan out.
Total – Adani agreement is one of the largest foreign direct investment deals in the Indian city gas distribution sector.
Total, the second-largest liquefied natural gas (LNG) company in the world, said that it would look to develop the natural gas sector in India through the partnership with Adani Group.
Adani is attractive to Total for several reasons. Firstly, the development of the Mundra and Dhamra regasification terminals provides
Total with market access for LNG. Secondly, Adani Gas was an active bidder in the recent distribution auction rounds. In turn, this will provide Total with a firm demand for gas.
Lastly, developing a standalone gas marketing and distribution business in India would take several years.
However from a near term perspective, Adani Gas may not enjoy the success that IGL and MGL witnessed as the new geographical areas (GAs) for gas distribution lack the favorable characteristics – namely, regulatory push and population density of metro cities,
Network development in these new 23 GAs will require an investment of around Rs.150 billion over the next 5-6 years and gence the ambitious expansion plans and back-ended earnings will lead to poor returns
However long term prospects for CGD are strong and have a huge runway for growth over the next 5 to 10 years.
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