21 Feb, 2011, 06.35AM IST, Pradeep Pandey,ET Bureau
MUMBAI: Essar Energy will provide a bank guarantee of $1 billion to close the offer it made to acquire Shell’s Stanlow refinery in the UK, according to a person who is part of ongoing negotiations with banks. This bank guarantee would be over and above the $350 million that Essar Energy agreed to offer for the assets of Stanlow refinery.
“The company (Essar) will finalise the bankers who will furnish the guarantee in the next three to four months,” said the person who requested anonymity as the transaction is still underway.
Typically, the purchase price of a functional refinery consists of the asset cost plus an amount for working capital which includes inventory. The value of the inventory, in the case of a refinery, is determined at the close of the deal to reflect the latest price of crude.
On February 18, Essar Energy made the offer to buy Shell’s 272,000 barrel-a-day refinery and the associated local marketing businesses for a total expected consideration of about $1.3 billion. Essar Energy’s deal value of $1.13 billion includes $780 million for the inventory with the UK refinery. Shell agreed in principle to the offer made by Essar Energy and has granted exclusivity to the offer until April 1, 2011.
“Crude and processed products have to be valued on the completion of the acquisition, based on prevailing market prices. As of now it has been estimated to be around $780 million,” said an Essar spokesman.
Under the terms of the asset purchase agreement, Essar will make the payment in two stages: $175 million payable on completion of the acquisition and a deferred payment of $175 million plus interest after a year of acquisition. In addition, Essar will have to make a separate payment for the crude oil, refined products other inventory with Stanlow.
Essar Oil UK and Shell will enter into agreements where Essar will buy crude and feedstock exclusively from Shell for a five-year period at spot prices for Stanlow refinery, and Shell will buy refined products for its retail and other businesses from Stanlow for durations of up to 10 years.
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