Thursday, April 22, 2010

Essar Energy valued at $9.5-11 bn

S Kalyana Ramanathan / London April 23, 2010

Bankers fix price at 450-550 pence a share for the London IPO.

Bankers handling Essar Energy's $2.5-billion (Rs 11,000 crore) initial public offering on the London Stock Exchange (LSE) have fixed the price at 450-550 pence a share. The book building for the issue commenced today and ends on April 29.

The price fixed today takes the valuation of the company to $9.5-11 billion. Essar Energy hopes to offload 25 per cent of the company.

Successful listing would also enable it to be considered for inclusion in the coveted FTSE 100 index. This issue will also be Essar's first offering to investors after 15 years.

As part of this initiative, Essar will list 20-25 per cent of an entity called Essar Energy Plc, which is constituted of the group’s power and oil & gas businesses. Essar had earlier said it would use the proceeds of the listing to fund its expansion in the oil & gas and power vertical. JP Morgan Cazenove and Deutsche Bank AG are the joint global coordinators for the issue, who provided the price band to commence book building.

Essar plans to raise capacity at the Gujarat-based Vadinar refinery to 375,000 bpd (barrels per day) by 2011 from a current capacity of 300,000 bpd. It said if market conditions permitted, the capacity would be increased to 750,000 bpd by 2013, making it India’s largest single-location refinery.

Essar also needs funds for exploration and production across its global portfolio of oil & gas blocks in Asia, Africa and Australia. Additionally, the group’s power business, scaling up from 1,220 Mw currently to 6,100 Mw in Phase I and 11,470 Mw in Phase II, will need capital infusion, the company said.

Essar Energy would be only the second company backed by an Indian promoter to go on the FTSE-100. The only other one is Anil Agarwal's Vedanta Resources.

The FTSE 100 is a market-capitalisation weighted index representing the performance of the 100 largest UK-domiciled blue chip companies. The index represents approximately 88 per cent of the UK’s market capitalisation and is considered suitable as the basis for investment products such as funds, derivatives and exchange-traded funds.

The Index also accounts for 7.97 per cent of the world’s equity market capitalisation. It began ticking in 1984 and today has 101 companies and 102 stocks (Royal Dutch Shell has two classes of shares) in it.

The timing of Essar Energy's issue and subsequent listing on the LSE comes close to the quarterly review of the constituents of the FTSE 100. The company must start trading on or before May 9 if it hopes to be considered for inclusion in the primary index on LSE. The next review for FTSE-100 comes on June 9 and one condition for being added to the list is that the stock must have been traded on LSE for at least 19 days.

Apart from the brand image, getting on the FTSE-100 list provides more tangible benefits. Exchange Traded Funds (ETFs), that are an integral part of the trading participants on LSE, usually look at the FTSE 100 for investments. The role of ETFs on the LSE has consistently grown year on year over the past 10 years since they began trading on this exchange. The value of ETF trades peaked in 2009 at £50.15 billion and was growing at 44 per cent over 2008.

Essar Energy will have to clear a list of conditions before it hopes to get on the FTSE 100. Apart from the prior 19-day trading rule, the stock must have a gross market capitalisation above the 90th company in the index at the time of review. In today's terms, this would mean a gross market cap of £2.6 billion. Interestingly this comes close to the issue value of Essar Energy's IPO. The stock will also have to pass certain liquidity conditions to be considered for inclusion.

The most fundamental condition, however, is that it must have an LSE listing and be a company registered in the UK. Hence, officially Essar Energy will be a UK-based company when it goes public, with the Indian connection strictly restricted to the promoters' nationality.

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