Essar Energy readies largest Indian listing in London

While there has been no shortage of investment opportunities in India's power sector in recent years, Essar Energy is giving foreign investors a chance to get a share of this fast-expanding industry through a London-listed entity that will also own 39% of one of India's fastest growing private sector oil and gas companies.

In an announcement issued last week, Essar Energy said it intends to go ahead with an initial public offering on the main board of the London Stock Exchange that is expected to raise approximately $2.5 billion. The plan is to sell about 20%-25% of the share capital in an offering that will be targeted at institutional investors.

A specific timetable has yet to be confirmed, but a source notes that it typically takes three to four weeks between the issuance of an "intention to list" and the launch of the deal, so the expectation is that the deal will hit the market towards the end of April. In the meantime, the joint bookrunners, Deutsche Bank and J.P. Morgan Cazenove will be busy on investor education.

At the planned size, this will be the largest Indian company ever to list in London, dwarfing Vedanta Resources $878 million listing in 2003. It will also be the largest listing on the LSE since May 2008 when New World Resources from the Czech Republic raised $2.5 billion from a listing in London, Prague and Warsaw, according to Dealogic. In terms of companies listing only in London, there has been no larger IPO since Eurasian Natural Resources from Kazakhstan raised $3 billion in December 2007.

The initial IPO capital, which will be used towards the funding of Essar Energy's existing growth projects, is of course important and the daily liquidity and greater international profile that comes with a London listing is also likely to have influenced the company's choice of stock exchanges. However, the key reason for choosing to list in London instead of in India, according to a source, is because London is an easier market in which to raise subsequent capital. One limiting factor in Indian equity markets is the floor price requirement on follow-on issues and qualified institutional placements, which makes it difficult to sell new shares in a falling market -- even when the decline is gradual and modest.

"London provides much wider options compared to the Indian markets, primarily on the debt side...and from an investor standpoint the UK market rarely sees large-size companies coming from India or with an Indian growth story," the source said, suggesting there could be some additional demand purely from a scarcity point of view.

It is expected that Essar Energy's market capitalisation of about $10 billion will put it in the running for inclusion in the FTSE 100 index. This should help boost investor interest even further.

The company also has a relatively clean structure, which makes it suitable for a London listing, the source added.

Essar Energy is incorporated in the UK, but with almost all of its assets in India, it will still be viewed as an Indian company -- much like metals and mining company Vedanta is. It is owned by the Essar Group, which it a diversified Indian conglomerate whose businesses also include steel, communications, shipping, ports, logistics, construction and metals and mining. The Essar Group, established by Shashi and Ravi Rui (currently chairman and vice-chairman), has an operating history of more than 40 years, employs about 60,000 people in 20 countries and generated revenues of more than $14 billion in 2009.

Essar Energy became the first private power producer in India in 1997 and currently owns four power plants with a combined installed capacity of 1,220 megawatts. It operates its oil and gas business, which includes exploration and production as well as refining operations, through its 39% stake in Essar Oil. The latter company is listed both on the Mumbai Stock Exchange and the National Stock Exchange of India, but with a free-float of just 11.4%, it isn't currently a realistic investment option for most foreign institutional investors. 

This alone should make the new London-listed vehicle interesting and in combination with the power business, it does offer investors widespread exposure to the Indian growth story. According to the company announcement, India currently has one of the lowest per capita consumption of power, oil and gas among the emerging market economies, which together with the fact that it is already the second fastest growing economy in the world after China is expected to lead to high growth in the demand for energy.

Based on data from A.T. Kearney, India had a power deficit of 11% in 2009 and the World Bank estimates that 44% of Indian households do not currently have access to electricity. With regard to oil and gas, Indians consumed only 0.9 barrels per person in 2008, compared with 2.2 barrels in China, 4.4 barrels in Brazil and 7.3 barrels in Russia. Aside from the general macroeconomic growth story, the demand for oil is also expected to grow strongly as more Indians buy cars. In 2009 there were only 35 vehicles per 1,000 of the driving population, which is among the lowest in the world.

"Essar Energy's future is wedded to the development of India and its growing energy needs," said Prashant Ruia, the company's vice chairman. "Now is the right time to open the business up to global capital, to fuel our future growth ambitions and to address India's significant energy deficit. This offer will help us bridge that deficit, while simultaneously allowing international investors access to India's growth story."  

To plug the shortages and meet the growing demand for power, Essar Energy is in the process of multiplying its generating capacity to 11,470MW by 2014. It has six new plants under construction that will boost capacity to 6,100MW by 2012 in what it refers to as its "phase I power projects". For these, it has already secured 73% of the total expected debt financing requirements (or 97% if you count non-binding sanction letters as well).

In addition, it has six plants on development that will increase capacity by a further 5,370MW, referred to as the "phase II power projects."

On the oil and gas side, Essar Energy has best estimate prospective resources of 1,012 million barrels of oil equivalent (mmboe) and 14 exploration blocks in India, Nigeria, Vietnam, Australia, Indonesia and Madagascar, including a block in Rajmahal in India for which it has been declared the provisional winner. It will also start commercial production of coal seam gas by the end of this year.

Downstream its assets include the Vadinar refinery in Gujarat, with a current annual capacity of 10.5 million tonnes and a throughput capacity of 14 million tonnes per annum, or 300,000 barrels per stream day, which makes it the second largest private sector oil refinery in India. The operating cost is approximately $1 per barrel below the industry average, which supports the fact that Essar Energy refers to itself as a "low-cost" energy company. The plan is to expand the capacity to 18 million tonnes per year, or 375,000 barrels per stream day, and to also increase the complexity of the refinery, by March 2011 (the phase I refinery project).

It also has plans for a potential second phase of expansion that will boost the annual capacity to 36 million tonnes, or 750,000 barrels per stream day. If completed, this will make Vadinar one of the largest and most complex refineries in the world, according to the company's own estimates.

The IPO proceeds will go towards the equity portion needed to fund the phase I and phase II power projects; the acquisition and development of captive coal mines; exploration and development of the oil and natural gas blocks; completion of the phase I refinery project; and other corporate purposes including working capital.

According to the source, the company following the IPO, the company will be fully funded across its projects for the next couple of years.

The deal is expected to draw primarily international investors as Indian funds typically don't buy shares in companies listed outside of India. And given the London listing, it is likely that European investors will account for the bulk of the demand, or 50%-60%.