Essar Oil-Rosneft Deal: How do the energy majors stand to benefit ?

Essar Group on Saturday confirmed that it will sell a 98 percent interest in its Essar Oil unit to a consortium led by Russia's Rosneft, giving the energy giant a foray into the world's fastest growing fuel market.

The deal has been considered the biggest foreign acquisition ever in India and Russia's largest outbound deal, according to Thomson Reuters data.

The all cash deal will see Rosneft, along with its partners Trafigura and United Capital Partners (UCP), pay $10.9 billion for Essar's refining and retail assets. In addition, $2 billion will be paid toward the acquisition of the Vadinar port in the western state of Gujarat, along with certain import and export facilities.

The deal has been seen as a win-win situation for both the corporate entities. Let us analyse as to how do Rosneft and Essar stand to benefit from the deal.

Benefits to Rosneft

1. Entry into Indian energy market, world fastest growing fuel market

Rosneft shall get a 49 percent stake in Essar Oil, with 49 percent being split equally between Trafigura and UCP. 

According to Chief Executive Igor Sechin, the deal gives Rosneft entry into one of the most promising and fast-growing world markets. It gives "unique opportunities for synergies" with its existing assets. Separately, Rosneft said it would use Venezuelan crude to supply the Vadinar refinery.

2. Control of Essar's 20 million tonne refinery in Gujarat

Rosneft and its partners to get control of Essar's 20 million tonne refinery in Gujarat, and its retail fuel outlets in India, where growth for refined petroleum goods in the next five years is expected to be in the 5 percent to 7 percent range.

3. Access to international markets from an Indian set up

Acquisition of the Vadinar port in the western state of Gujarat shall help Rosenfet get access to certain import and export facilities, thereby getting the much required access to global energy markets.

The 49 percent stake in Essar Oil will give them control of the entire downstream business of Essar Oil, the companies are getting a relatively new and sophisticated refinery and retail network, which will continue to play a critical role in serving a fast-growing captive market at home, besides being well-placed to compete in the export markets.

Benefits to Essar Group

1. Cash Infusion will help Essar Group service huge debt burden

The diversified conglomerate Essar group, with a presence in oil and gas, steel, ports and power, has a huge debt burden to service. The group, according to a report in a leading financial journal, has loans Rs 1.2 lakh crore debt. The deal will be help the group reduce its debt burden by Rs 75,000 crore, Essar director Prashant Ruia has told the Business Standard.

2. Group to have in-depth and larger focus on other business platforms

The Essar group which is a diversified conglomerate, with a presence in oil and gas, steel, ports and power will now focus more on its other businesses such as steel and ports, as per a report in the Economic Times.