Tuesday, May 4, 2010

Essar Energy lowers price of London IPO

S Kalyana Ramanathan / London May 1, 2010

Will raise $1.94 billion on LSE; listing on Friday

Essar Energy will raise $1.94 billion through its initial public offer (IPO) on the London Stock Exchange (LSE). The figure is lower than what it had targeted earlier, as the company had to revise the price to 420 pence a share from its previous range of 450 to 550 pence. The IPO coincided with volatility in the stock market after a wave of credit downgrades rattled investor confidence this week.

The revised issue price pegs Essar Energy’s valuation at $8.5 billion and, at $1.94 billion, it is the second-largest issue on the LSE after October 2007.

Essar Vice-Chairman Prashant Ruia said there would be conditional trading before the actual listing on May 7 (Friday), for which the entire Ruia clan would be present. The company has a greenshoe option of 10 per cent, which has to be exercised within 10 days.

Ruia said the gap between the company’s projected issue proceeds was just $0.09 billion. The offer comprises around 303 million new shares, representing 23.24 per cent of the company’s enlarged issued share capital (assuming no exercise of the over-allotment option).

Immediately after the completion of the offer, Essar Global Ltd will continue to hold around 76.74 per cent of the issued share capital.

Ruia said the company will use the issue proceeds for investment in its oil and gas assets in India and not in buying any oil assets abroad. Essar Energy plans to increase its power generation from 1,220 Mw to 11,470 Mw in two phases, while the oil refinery capacity will be increased to 7,50,000 barrels a day by 2013, making it India’s largest single location refinery.

Essar is also raising money to carry out exploration and production across its global portfolio of oil & gas blocks in Asia, Africa and Australia.

Investor response has been encouraging, given the backdrop of the financial and economic uncertainty that intensified in the week of book-building, with the Greek debt crisis looming large on the financial markets, he said. The issue went into book-building between April 23 and 29.

Even before the issue went into book-building, reports in a section of the media had questioned the price of the issue and the risks attached to it. Questions had also been raised about the composition of Essar Energy’s board, which has seven members, with four independent directors. The CEO of the company is Naresh Nayyar and the four independent directors are Simon Murray, Philip Aiken, Subhash C Lallah and Sattar Hajee Abdoula.

The company, on its part, had tried to correct this by bringing on board a fifth independent expat director who has a long record in good governance.

The Ruias hope to get into the coveted FTSE 100 list (of the 100 most highly capitalised companies on the exchange), that will make it the second company backed by Indian promoters to be on it. Currently, only Anil Agarwal’s Vedanta Resources holds this distinction.

J P Morgan Cazenove is acting as the sole financial adviser and sole sponsor for the offer and together with Deutsche Bank (London Branch) as the joint global coordinators and joint bookrunners. BNP Paribas, Nomura International Plc and Standard Chartered Securities (Hong Kong) Ltd are acting as co-managers.

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