IPO price band values Essar Energy at $9.5-$11 bn

Essar Group on Thursday launched an initial public offer in its energy and power businesses to raise about $2.5 billion, said sources, in what is set to be the biggest IPO in London since 2007.

New shares will be issued in a range of £4.5-5.5 each in an offering that will close on April 29, the sources said. The price would imply a valuation of $9.5-11 billion for the energy subsidiary, Essar Energy.

“The dilution is likely to be around 25%,” said a source, unwilling to be on the record. The company had in its intent to float (ITF) document last week said it was looking to give a stake of 20-25%.

According to London-based media reports, many investors had demanded lower valuation than the $10-12.5 billion that the company had initially pitched to institutional investors.

Unlike in India, UK listings can be confined to institutional investors only, as Essar has chosen to. As a result, most of the negotiations are done through presentations and roadshows.

According to the source, Essar held two big meetings with investors, one on Wednesday and another on Thursday, to an encouraging response.

The company is likely to be included in the main, FTSE 100 index of the London Stock Exchange after the IPO, which is likely to list in the first week of May.
The new funds will boost Essar Oil, the subsidiary that currently holds most of the assets of Essar Energy.

Essar Oil has been hit by a high debt burden on the one hand and a global downturn in refining on the other.

Essar Energy accounts for around 60% of the $14 billion annual revenues of the Essar group, which also has a presence in the telecom industry through a one-third stake in Vodafone Essar, India’s third biggest mobile operator.

The company will use only about a third of the expected receipts from the IPO for its refinery project and general expenses, while two-thirds of the proceeds will be used to establish the company’s name in the power business. “We are planning to increase our production capacity from 1,220 mw to 11,000 mw by 2014,” Prashant Ruia, vice chairman of Essar Energy, said recently.

The expansion into power generation will be in two phases. In the first, the company will put up three new power projects, each rated at 1,200 mw of peak capacity, and expand its existing facilities.

The first phase, to be completed in three years, will add around 4,900 mw and will be followed by the second phase, which will add another 5,370 mw over the next two years.

After the first phase of expansion, Essar Energy will be in a position to sell around 64% of its total power production to non-Essar customers, compared with just 25% now.