The merger of Reliance Natural Resources Ltd (RNRL) and Reliance Power (R-Power), set to align the power and gas businesses of the Anil Dhirubhai Ambani Group, highlights two things.
While the merger will see the share of the promoter group increase by two percentage points, the move has also seen a few analysts raise concerns.
For the first part, the rise in promoters’ holding covers a portion of the bonus issue made by Anil Ambani from his shareholding in 2008, after the dismal listing of R-Power post its public issue. The bonus issue was made for public shareholders in a 3:5 ratio, when the listing of Rs 430 per share was seen as a dampener in the markets. The promoter shareholding had gone down from 45 per cent to 40 per cent after the issue.
Based on the announced 4:1 merger ratio, the equity dilution will be 14.5 per cent. The shareholding of ADAG in R-Power Power will go up from 40 per cent to around 42 per cent in the combined entity. Meanwhile, the holding of Reliance Infrastructure, the listed arm of the group, is slated to fall from 45 per cent to 38 per cent. The balance 20 per cent in R-Power will be held by the public.
On the other hand, while the deal is expected to give more clarity to the government, as RNRL is a signatory to the gas sales master agreement (GSMA) with Reliance Industries Ltd, it could have a negative impact on R-Power’s gas-based projects, reckon analysts.
According to Goldman Sachs, the value of the GSMA at $760 million (Rs 3,540 crore) implies a marketing margin of $0.4 per mBtu of gas supplied to R-Power plants versus $0.13 per mBtu earned by RIL for its KG basin gas. With implied marketing margins being thrice the margins charged by RIL to other gas consumers, Goldman believes the high cost will negatively impact the internal rate of return of R-Power’s gas-based projects.
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However, there is the enhanced reliability and cost efficiency for R-Power’s coal-based plants through RNRL’s coal supply logistics and shipping business, say analysts.
The advantage for R-Power is that RNRL has been allocated four coal bed methane (CBM) blocks and has a 10 per cent stake in an oil and gas block in Mizoram.
However, the visibility on earnings on this front is missing at the moment, reckon analysts. RNRL effectively derives most of its value from the GSMA, as 85 per cent of its financial year 2009 gross block is composed of goodwill and its CBM, Goldman notes.
Analysts at JPMorgan reckon RNRL’s share in CBM blocks and the proposed coal supply logistics and shipping business plans are still nascent. So, these will not contribute materially to earnings of the merged entity in the medium term.
Analysts say R-Power is still among the most expensive of stocks in independent power project companies, with its enterprise value at around 85 times its earnings before interest, taxes, depreciation and amortization (Ebitda).