ONGC's Buy: Signing Into Europe

A day after Infosys announced that they had agreed to buy out UK based Axon Group for what will go down as the biggest deal in the history of Indian IT services, the foreign arm of India’s largest oil corporation ONGC (Oil And Natural Gas Corporation) ONGC VIDESH did one better by announcing that they had agreed to purchase another UK based company : Imperial Energy .This deal when done will be the biggest deal in the history of  Indian oil companies and is a sure sign that India Inc. is firmly looking to make good buys in the European markets.

It’s interesting to note both companies have made these major decisions at a time when the world economy is in peril. For ONGC this decision had been brewing for a long time. They had always been interested in buying Imperial. The decision to strike the right deal at the right time has worked for them and has been light on their pockets.

If ONGC had decided to buy out Imperial even two months earlier, they‘d have paid a lot more than the current price of 1250 pence per share amounting to a total of 1.4 billion pounds. This is based on the fact that oil prices were hovering dangerously around the $145 per barrel mark that had expectedly driven up the prices of oil and energy companies including Imperial. A valuation at that time had revealed a bigger price for Imperial but ONGC smartly held on to make their move now.

ONGC’s buy is a sign of what the rest of the world has started to realize only now. Indian companies are making their move in the European markets. It’s only the major deals that get reported but many Indian companies have been looking to buy European companies and succeeding. This strategy is largely based on the fact that future growth will occur more in this part of the world .It’s the same reason why many Indian companies have thought twice over buying American companies even at decent valuations.

It’s also interesting to note that many of these deals are being funded by internal cash. A certain part of their revenues are being diverted towards acquisitions instead of the usual method of borrowing from shareholders or banks. It’s not surprising when ONGC which has revenues in billions decides to do this but it is so when smaller companies are confident of doing the same.

However, for ONGC which accounts for almost 80% of India’s crude oil production a move like this is a strategic one. It allows them to dig into the oil fields of Siberia and Kazakhstan which contain large areas of unexplored crude. Imperial Energy makes most of its money from these areas.

The competition for the buy of Imperial has also come from China’s biggest state held company in Sinopec who were beaten by ONGC in the dying days of the deal. There is a minor chance but a faint one that Sinopec could still cause a surprise and outgun ONGC. However, with things having become more or less certain, ONGC will buy out Imperial and continue the long trend of Indian companies acquiring European assets.