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ONGC Videsh – Imperial Acquisition

August 27, 2008

ONGC Videsh Ltd has announced an agreement to acquire Imperial Energy for all-cash consideration of £1.4bn (US$2.8bn) (subject to regulatory clearance). Imperial is an E&P company with assets primarily in Russia. Imputed EV/boe of US$3.1/boe (2P) makes the acquisition appear positive, though high tax structure hampers NAV. Also, Imperial has been trading at a discount to NAV because of political risk, which could be materially addressed given ONGC’s presence in Russia.

Imperial earns below int’l prices for its crude sales. Under the Russian taxation regime, crude exports are taxed at beyond US$15/bbl Urals US$49,712M.

The offer leaves room open for a competing bid (at >10% higher than current bid of £12.50/share). According to press reports (Reuters), Sinopec is planning to make a competing bid, though ONGC is reportedly willing to up its offer to £15/share in such a scenario. Any aggressive bidding war could make the acquisition NAV neutral at best.

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