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Creditors’ Plan & Deal Structure Key To RIL-LB Deal

14 April, 2016

Two months back, Bharti Airtel’s talks with South Africa’s MTN fell through, steamrolling its plans of creating an emerging markets mobile service behemoth. Legal and regulatory hurdles blocked the deal like the Chinese Wall. But, the good news is that India Inc. is back to deal-making, that too the bulge-bracket ones.

Late last week, Reliance Industries (RIL) announced that it is planning to court bankrupt LyondellBasell (LB) in a deal, many analysts and trackers, value at up to $12 billion. It would make RIL a big daddy in the global petrochem industry pecking order.

Interestingly, back in 2007, Bassell to buy Llyondell for about $12.7 billion and assuming debt of another $6.7 billion. And, in 2005, Bassell itself was acquired for $5.7 billion by The Chatterjee Group and US-based Access Industries Inc (owned by Russian oil billionaire Leonard Blavatnik).

Now, if RIL had pushed a similar deal two years back, the valuation would have been in the region of upwards of $20 billion, experts told VCCircle.

Even at a maximum of $12 billion, if the deal pulls through, for India Inc, it could well turn out the largest overseas acquisition by an Indian company. Past records have been set by Tata-Corus, Tata-Jaguar & Land Rover and ONGC-Imperial Energy.

VCCircle caught up with experts from the legal and financial fraternity to get a wide angle view of the deal in the making. Excerpts:-

Abhijeet Biswas, Director, Equirus Capital

–Challenges in the way of such a bulge-bracket acquisition: LyondellBassell closed year 2008 with revenues of $50 billion and an EBITDA of negative $6 billion. If the refining margins improve in the near term, we could expect the EBITDA to be at near 5-6% of sales level at par with the years 2007 and 2006. This would bring expected Enterprise Value at close to $10-11 billion at around 5X EBITDA.

While there are many synergies in this acquisition in the upstream level, there are many overlaps with Reliance’s current business in the downstream. LB has $7.06 billion in bonds and loans due to mature next year and a further $20 billion debt is due through 2027.

–How RIL will finance it: Reliance has cash of 25,000 crores. It could use some of that to part-finance the transaction. Some existing debt on the books of LB could be rolled over post acquisition as the current lenders would be only glad to do so.

–Challenge in Acquiring bankrupt asset: LB is under Chapter 11 reorganization that would require positive approval from all lenders in the pecking order of secured to unsecured. Any disapproval from lenders if they deem the terms to be unfair to them could add to delays thus adding to the complexity of the transaction. We saw similar delays in the case of Asarco bid as well.

–Top line, bottom line and strategic advantages for RIL: This deal immediately allows RIL to capitalize on LB’s excellent distribution reach in Europe and North America. In addition, the combined revenue of over $80 billion would be bigger than competitors like BASF and Dow Chemicals. If the valuations are in the range of $10-12 billion, then that would be fair price for this transaction. LB could further improve its margin if RIL can leverage its low cost manufacturing and bring some production to India. LB could continue to add to its value added product portfolio on account of its excellent R&D facilities.

Abhishek Sinha, Associate (M&A & PE Team), Khaitan & Co

–Legal perspective: This proposed investment by RIL will be classified as an ‘overseas direct investment’ and it appears to fall within the automatic route (if the threshold linked to the net-worth criteria is not breached). RIL will also have to follow the guidelines laid down by RBI in relation to direct investments in JV/ WOS abroad. In short, there appears to be no big legal hurdle, however, the transaction structure, which is finalised between RIL and LB, will have to be analysed before commenting on the same. The applicable laws of LB’s jurisdiction will also have to be looked into as it may potentially affect the proposed acquisition.

–Challenges In Acquiring Bankrupt Firm: It is unclear whether this deal will be a potential alternative to LB’s reorganisation plan to emerge from Chapter 11 bankruptcy or it will happen after LB emerges from Chapter 11. The litigation between LB’s unsecured and secured creditors may pose a hurdle to the deal. Further, from a timing perspective, like Tata-Corus, this deal may also take several months before it is concluded.

Prof N L Mitra, senior partner at Fox Mandal Little

–The deal challenges: RIL is going to become one of the biggest petrochem players in the world, post the deal. It will come under competition policy of the US. There will also be concern about how this merger will take care of investor interests. But, more than legal issues, economic aspects will be far more challenging.

–Bankruptcy different from insolvency: Bankruptcy is a cash crunch situation and so, RIL gets an asset at a lesser price. The deal will bring RIL the advantage of tech assimilation as LB has a wide range of patents. LB’s intellectual property domain will outweigh its cash crunch for the asset-backed RIL.

Deepak Pareekh, Angel Broking

–Structure key to deal: We still do not know how the structure will pan out. Will creditors own some stake? That will determine the value of the deal. RIL has $8 billion treasury stock and $4 billion cash in the books. The debt to equity is pretty low and financing is not a problem. The issue really is how the creditors will take it forward. The deal will take some time as the creditors reorganisation plan itself will take till February.


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Creditors’ Plan & Deal Structure Key To RIL-LB Deal

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