Just Who Is Buying Up Essar Oil And What Does It Mean?

By – Prof. Tom James – CEO, Navitas Resources

In October of last year, the billionaire Ruia brothers inked in a deal to sell a 98% stake in Essar Oil in an effort to draw down the debt pile of Essar Group. The consortium of buyers for India’s fifth largest oil and gas company1 consists of Russia’s largest oil producer, Rosneft, which will take a 49% stake, commodities trader, Trafigura and a Russian based investment fund called United Capital Partners (UCP), together sharing the remaining 49%. They will pay around $10.9 billion for the company, which includes its 3,500 retail fuel outlets India-wide and the country’s second largest oil refinery, Vadinar. A power plant which supplies the refinery, and a deep-water port which is part of Essar Ports, will cost the members an additional $2 billion.2

Just last month (July), the long-running deal finally cleared the last regulatory hurdles and overcame the objections of various Essar Group lenders. These included several Indian banks badly exposed to Essar Oil and other Essar Group companies3, and those of the state-owned insurance company, Life Insurance Corp. of India (LIC). It reportedly only relented when the Ruia brothers agreed to pay a significant portion of Essar Group’s multi-billion dollar debt to it.4

The deal is set to be finalised in early August, but who are the buyers who are set to complete the country’s largest ever single foreign investment? The identities of the Russian state-owned oil and gas behemoth, whose shares are listed in London, and Trafigura, the world’s third largest commodities trader are well-known, but who exactly is UCP and what does its presence on the consortium mean for Essar Oil, a company of considerable strategic worth to India?

Analysis of UCP’s history surprisingly is quite encouraging. It is led by Ilya Sherbovich, a former chess champion, and experienced investment banker, who made his name at a Russian investment firm called United Financial Group (UFG). This prospered during 1990s Russia, advising clients on deals and investing itself in the Securities Market, including Gazprom, where it campaigned to clean up the company’s then notoriously bad corporate governance.

UFG’s success didn’t go unnoticed and in 2003, Deutsche Bank invested in the firm, with Sherbovich leading the bank’s expansion into the country. In 2005, Sherbovich was named the “Best Investment Banker of the Year” by the National Association of Stock Market Participants, and he served as Head of Global Banking for Deutsche Bank in Russia and President of Deutsche UFG between 2006 and 2007.

Shortly after Deutsche Bank assumed full control of UFG in 2006, Sherbovich left with around 20 of his colleagues, setting up UCP the following year. The new company’s strategy, focussing on long-term investments of undervalued Russian businesses, has proven to be extremely successful, with most of its peers – with short term outlooks – falling by the wayside. So far so good for Essar Oil, which will benefit from such a long-term outlook, and not some short term private equity fund determined to extract maximum value before bolting after a couple of years.

What is most interesting about UCP, however, has been its involvement in standing up for minority shareholder rights; a rarity in Russia. It has also not been afraid to take on some powerful state players. Most notably, it lobbied and successfully fought for the listed-state monopoly pipeline company, Transneft, to increase its dividend payments in line with commitments it had made in its company charter. After several lawsuits and court hearings, Transneft eventually relented and has agreed to pay out at least 25% of its net profits.5 UCP has since sold out, reportedly for almost USD 2.9 billion, in order to fund the Essar Oil deal.

UCP is clearly a company with backbone which may come in handy in pushing through much needed reforms at Essar Oil in order to make it more efficient and profitable, not to mention stand toe-to-toe with its better-known partners. Time will tell. For UCP, however, with a deal of this size, in a market developing as fast as it is India, it really has announced itself internationally.

*Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of Oil Asia Publication.