Gulf Oil's $1 bn acquisition: Large size and high valuations a concern

MUMBAI: Hinduja Group's lubricant and explosives maker Gulf Oil has acquired global leader in specialty lubricants Houghton International for $1.045 billion. The acquired company is nearly four times Gulf Oil in revenues and six times at EBITDA level. However the markets appear unimpressed, as the scrip has remained subdued since announcement.

The acquisition is expected to offer Gulf Oil a much larger geographical reach and access to new technology and new products.

How the acquisition is funded will remain a key question considering Gulf Oil's limited balance sheet strength. For the year ended March '12 Gulf Oil had a consolidated debt-to-equity of 0.35 on a net worth of Rs 1065 crore. Thus leveraging its own balance sheet won't be sufficient to fund this acquisition.

This leaves the option of funding the acquisition with temporary bridge loans and shifting the burden to Houghton's balance sheet post acquisition. However, being privately held, information about Houghton's financials is not known.

At more than 9 times EBIDTA level, the acquisition valuation of Houghton also appears slightly on a higher side. Gulf Oil itself is valued at around 8 times, while smaller companies in this industry like Savita Oil Technologies, Apar Industries or Sah Petroleum are trading at valuations between 3 and 5 times their EBIDTA.