UK-headquartered BG Group is looking to divest its stake in its majority-owned Indian subsidiary Gujarat Gas Company Ltd (GGCL), India’s largest private sector natural gas transmission and distribution company.
The BG Group owns 65.12 per cent in GGCL through BG Asia Pacific Holdings Pte Ltd and if it sells its entire stake, the deal might be valued around Rs 3,495 crore ($715 million) or more. However, it is not clear how much stake the BG Group is looking to divest.
In a disclosure to the stock exchanges, Ahmedabad-based GGCL has stated that it has been informed by its majority stakeholder that it has started a process that may result in divesting its shareholding in the firm.
BG Group shares were trading 2 per cent higher in early trades on London Stock Exchange on Tuesday.
GGCL scrip dropped 4.6 per cent to close at Rs 418.5 a share on the BSE on Tuesday, in a flat Mumbai market. At this price, the firm is valued at Rs 5,367 crore or around $1.1 billion.
The company that had revenues of Rs 653.3 crore with net profit of Rs 80.47 crore for the quarter ended September 30, 2011, had been in the news recently when the state government of Gujarat approached the Competition Commission of India (CCI) alleging that the company was charging higher price for CNG despite low domestic prices. The CCI is expected to hear the case today.
The BG Group acquired stake in GGCL in 1997 from key shareholders including the Mafatlal Group and Gujarat Industrial Investment Corp. By the end of June this year, GGCL served around 325,000 residential, commercial and industrial customers through a pipeline network of approximately 3,850 km and fuelled more than 150,000 natural gas vehicles (NGVs) with compressed natural gas (CNG). In 2010, its distribution sales volumes were 1,212 mmcm (1,035 mmcm in 2009).
BG Group In India
Besides majority stake in GGCL, the BG Group has other assets in the energy business in India. It runs a joint venture with GAIL for Mahanagar Gas Ltd, India’s largest gas distribution company in terms of customer base. The BG Group and GAIL each has 49.75 per cent stake in the JV with the residual stake held by the government of Maharashtra.
The BG Group also holds 30 per cent stake in the mid and south Tapti gas fields and the Panna/Mukta oil and gas fields (ONGC owns 40 per cent and Reliance Industries holds the balance 30 per cent).
The BG Group also owns 45 per cent in exploration block KG-OSN-2004/1 in the Krishna Godavari (KG) Basin (ONGC holds the remaining 55 per cent); 25 per cent interest in exploration block MN-DWN-2002/02 in the Mahanadi Basin on the east coast of India; 30 per cent in a consortium that was awarded an exploration block (KG-DWN-2009/1) in deep water in the KG Basin.
The NELP 9 licensing round was launched in October 2010. A consortium led by the BG Group (50 per cent owner and operator) was identified as the qualifying bidder for an exploration block (MB-DWN-2010/1) offshore at the west coast of India.
Two years ago, BG India Energy Solutions Pvt Ltd (BGIES), a wholly owned subsidiary of the BG Group, commenced midstream gas marketing operations in India. The firm has approval to undertake wholesale marketing and distribution of natural gas from domestic sources, as well as LNG. Early this year, GGCL entered into an agreement with BGIES for the purchase of re-gasified LNG (RLNG).
Two months ago, the BG Group also struck a deal with Gujarat State Petroleum Corporation (GSPC) for the long-term supply of up to 2.5 million tonnes per annum of LNG. Under the agreement, the group proposes to sell the LNG volumes to GSPC for up to a 20-year period beginning as early as 2014. The BG Group and GSPC intend to complete negotiations and execute a fully termed LNG sales & purchase agreement early next year.
BG Group Strategy & Implications
Although the firm has presence across the entire value chain, its exploration & production (E&P) business remains the core of its activities. Its downstream operations under transmission & distribution (T&D) are largely carried out in India and Brazil.
On the face of it, the decision of a multinational to exit well-established business operations in India would be puzzling. But the move might be attributed to renewed focus on upstream (E&P) and midstream businesses including minority stakes in various gas blocks as mentioned above, as also the recently set up midstream marketing operations under BGIES.
Besides GGCL, the group has downstream operations in India through Mahanagar Gas Ltd and through 60.1 per cent holding in Companhia de Gás de So Paulo (Comgás), the largest gas distributor in Brazil. Comgás serves natural gas to residential, industrial and commercial customers through a pipeline network of over 6,900 km in the So Paulo concession in Brazil.
For the third quarter ended September 30, 2011, revenues from T&D business was up 16 per cent, primarily due to foreign exchange gains in Comgás and higher volumes and prices in Gujarat Gas. However, total operating profit in the quarter dropped by over a third as a result of the timing effect of gas cost recovery in Comgás. Factoring this out, total operating profit at Comgás increased due to better margins and favourable foreign exchange movement.
Analysts are watching out for the BG Group’s statements and next moves in these two assets (MGL and Comgás) which would result in complete exit from downstream business globally.