Deal Analysis: Building Global Scale With RIL-RPL Merger

03 March, 2009

Mukesh Ambani has yet again followed a strategy that Reliance Group has been using for the last three decades. Conceptualise and execute a large project in the petrochemical space through a new company(raising debt on the new firm’s balance sheet). And after the initial gestation period amalgamate it with the parent allowing the parent to hedge the project risk at the time of execution.

The end result is a goliath:

* the country’s largest (overtaking ONGC given analyst estimates) and among the world’s top 50 profit making corporations

* having the world’s largest refining capacity at a single location(Jamnagar)

* sixth-largest private sector(and 13th overall) refiner in the world with a total capacity of 1.24 million barrels per day

* fifth largest polypropelene maker in the world

According to the company the merger of RPL(which incidentally just started operating over a month ago) with RIL is to build scale and benefit from operation synergies.

Some Positives

The positives of the merger would become apparent in next few quarters but as RIL finance chief Alok Agarwal said, the earnings multiple of an integrated energy company(read: oil and gas) were far greater than that of a single energy company. Such integrated firms reduces earnings volatility and since crude price has slumped could provide a cushion for RPL shareholders.

On the other side, the merger will strengthen RILs’s cash flow and balance sheet and be tax efficient as otherwise RPL’s dividend to RIL, would have attracted dividend distribution tax. At the same time the merger could benefit RIL in taking advantage of RPL’s depreciation.

The parent company will also save on transfer pricing on use of about-to-begin gas production from the Krishna-Godavari basin, by RPL. Some analysts are also indicating clear advantage in gross refining margins (GRMs), at a time when such margins are under pressure globally.

Supporting Cast

The back room boys of the India’s biggest ever merger include: PwC (tax advisor), JM Financial and Kotak Mahindra Capital(transaction advisors), Amarchand & Mangaldas & Suresh A Shroff & Co. (legal advisors).

Merger Ratio

Although the share swap ratio of 1:16 for the merger was close to the street expectations, it did take the market by surprise albeit to a small extent. Analysts were expecting the ratio to be negative for RPL shareholders as it was estimated to come at 16-18 range i.e 1 share of RIL for around 17 shares of RPL.

The expectations were based on the history of such mergers of the Reliance group. Usually the shareholders of the parent gained out of such mergers. With the merger ratio pegged at 1:16 it has protected the interests of RPL equity holders.

Rating Agencies Say The Event Is Neutral

Moody(which owns ICRA) has stated that it has always assessed RIL and RPL on a consolidated basis and has re-affirmed its stable outlook for RIL. Crisil(now backed by S&P) has also affirmed stable outlook to debt instruments of RIL.

Brothers Trivia

The merger would also spring back RIL close to younger brother Anil Ambani’s Reliance Power as the firm with the most number of individual shareholders in the country. As of 2008 December-end, Reliance Power had around 3.9 million retail shareholders, while RIL had 2.18 million shareholders. It is estimated that upon the completion of the merger, RIL would have as many as 3.7 million shareholders.


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Deal Analysis: Building Global Scale With RIL-RPL Merger

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