The government's decision to regulate marketing margins for natural gas will hurt the deal valuation in BG's sale of its 65% stake in Gujarat Gas, which has attracted ONGC, Bharat Petroleum, GSPC, Adani, Torrent Power, Germany based E.ON, Electricitie-De France and global private equity firms, executives and bankers said.
A person close to the deal said that "This issue could affect BG's overall valuations.” Leading gas transportation firm, state run Gail India, has already opted out of the race as it felt the current share price of the company was too high to make it a worthwhile target.
The source said that "The government wanting to regulate marketing margins effectively means that the only remaining pricing freedom which is a critical hedge against various risks associated with distributing and retailing gas will no longer be in the control of Gujarat Gas. It is a major deterrent.”
Until now, marketing margins were negotiated between buyers and sellers and gas marketing companies like Gujarat Gas, Reliance Industries, GAIL, Adani, Petronet LNG, Indraprastha Gas, Mahanagar Gas. The government has now asked the Petroleum and Natural Gas Regulatory Board to intervene in the matter, which oil ministry officials said was being done in the interest of consumers.
A source close to Gujarat Gas said that "Obviously investors will be worried, the marketing margin is the only cover against risks stemming from say gas prices crashing to USD 5 and a company has signed a long term contract of gas supply for USD 10, then who reimburses the company?.”
Last week shares of most gas distribution companies fell 2 to 5% following news that the petroleum regulator would determine marketing margins.
A source close to one of the bidders said that "The marketing margin issue could become a major hiccup in the deal as some bidders could even pull out of the race as it is critical to the profitability of the company.”
Mr Deepak Pareekh energy analyst of Prabhudas Liladhar said that "Marketing margins are an essential risk mitigating mechanism, so potential investors interested in BG's stake in Gujarat Gas will take the issue seriously.”
(Sourced from ET)
