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"The Merger Doubles RIL’s Cashflow Overnight:" Sanjiv Agrawal, E&Y

04 March, 2009

As companies across the globe are restructuring to take advantage of the financial and operational synergies, the merger between Reliance Industries Ltd and Reliance Petroleum is a move in the right direction. Reliance has always sought synergies, as in the past, it has gobbled up four of its subsidiary companies. The trend may continue in the Reliance empire, for instance, the same kind of consolidation is expected in Reliance Retail once the business risks gets established. Sanjiv Agrawal, the national leader for E&Y Valuations Practice in India and also the valuation advisor for RIL in the merger, talks to VCCircle on what the “big deal” is all about. Excerpts:

 

What was the rationale behind the merger?

RIL has always done that. They create companies to implement projects so that risk doesn’t come to the parent company’s balance sheet, and when they are commercialised they merge those projects. There are benefits of scale that come via integration. There were no benefits keeping it separate now. 

 

Why do you say that?

Earlier, Chevron was also there. They might have not liked it then. Now that Chevron is also out, so I think purely from an operational point of view, it just makes sense to have it integrated. It will also help in bargaining of crude prices etc. Although it can still do it, with two companies, but then it provides comfort in accounting, bargaining. So operationally, it still gives them much of flexibility, if you are within the same entity. 

 

Why does Reliance do it always?

It’s a good thing because it takes away holding company’s responsibility. Having complex structures are not good for shareholders either. With such complicated structures are corporate governance issues, transfer pricing issues and so on because there are a lot of facilities that are shared in common. This is a very corporate governance friendly action. 

 

Do you think it was a very timely merger?

I think fairly yes, because RPL has now got commercialised. As I said, the main purpose was to insulate the parent company, that purpose is solved now. Now it’s time to design ways to get cash to RPL. There’s no project risk to RIL. Now, it will only make cash. 

 

What are the profit estimates?

09-10 will be the first year of their sales. This quarter might not see much sales. I am not sure, they haven’t told us, it is anyways dependant on forecasts. 

 

Wasn’t it fairly challenging during valuations as RPL just began operations a month back?

Because they had started operating, we could find the GRM (gross refining margins) numbers for them, else its gross refining margins would have been much more challenging. Now we could find GRM and then we had to adjust it for OPEC (Organisation of Petroleum Exporting Countries). 

 

Will it increase the valuation of RIL in the long run?

Absolutely, because they have doubled the refinery capacity. They will have huge cash inflows in the main company. They already own 70-75%, but now the money will actually be in the main company. It will double the cash flow of the main company overnight. 

 

Talking about the share-swap ratio. Don’t you think I will feel a little cheated on being an RIL shareholder ?

No, I don’t think so. RIL shareholders will benefit in the long run as RIL doubles its refinery. They will grow in scale hugely now. What I have heard is that they have overnight become a Fortune 50 company. There will be huge benefits of integration as everything is in the same company now.

 

When exactly did you get involved ?

We got involved in it for a last few days. 

 

Was this expected?

Given RIL’s track record, it was a fair expectation. 

 

How was the valuation exercise?

Every valuation process is challenging. It was relatively simpler because both the companies are listed and have good track record. Had it been unlisted, it would have been more challenging. 

 

What does it mean for Mukesh and RIL now?

For Mukesh it means, what it means for every other shareholder. If at all, his stake is actually coming down by 2%, as every minority shareholder of RPL now becomes the shareholder for RIL. For the companies, it provides with more operational and legal flexibility and integration benefits. This is what the private equity people also advise their investee companies to do. 

 

Do you think we would see more of such internal restructurings going forward?

I will think so because it’s a good idea to simplify things and make it linear. It has been happening for past 5-10 years and this will only strengthen going forward. 

 

Especially during the times of slowdown?

Otherwise it’s very difficult to survive during these times. It’s good for their own health – for example, in this case, RIL becomes healthier. RIL’s balance sheet overnight becomes much more heathier, bigger, more linear, more integrated. It’s good for the shareholders, and the fundamentals of the company. 

What more can be expected going forward?

Going ahead, they will look at organic growth and ways to get cash flows into the company. They already have Reliance Retail, which is going slow now, but once the market improves, they will look at carrying on the process with that.

Will they look at acquisitions?

From a valuation perspective, it’s a good time to acquire now. But, I don’t think they will do it now. Once the cash starts flowing in, they can look at this. I think it will not happen at least before an year.


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"The Merger Doubles RIL’s Cashflow Overnight:" Sanjiv Agrawal, E&Y

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