IOC, IBP merger swap at 1.25:1

IOC announces 45% interim dividend.

The swap ratio for the merger of Indian Oil Corporation and IBP has been set at 1.25:1. The IOC board, which met here today, decided that IBP shareholders would get 125 IOC shares for every 100 held by them.

The board also cleared a proposal to pay an interim dividend of 45 per cent, which will result in an outgo of Rs 526 crore.

On the Bombay Stock Exchange, the Indian Oil scrip jumped to the day's high of Rs 546 before ending 1.1 per cent lower at Rs 515.95. The IBP scrip lost 1.57 per cent to close at Rs 615.70. The counter saw an intra-day high of Rs 661.90.

Dhimant Shah, portfolio manager at ASK Raymond James Asset Management, said: "The two companies have tried to price the merger ratio around the IPO price. A good ratio would have been around 1.5:1 in favour of IBP."

Institutional shareholders were expecting between 135 and 150 IOC shares for every 100 IBP shares, but IOC Chairman and Managing Director MS Ramachandran said the swap ratio was "quite generous".

He said share prices of the past six months, expected earning potential of IBP and the company's valuation were taken into consideration before taking the decision. "We have taken extra care to be fair to shareholders," he said.

The merger is likely to result in a reduction in overhead expenses by about Rs 45 crore a year on account of tax savings. It will also lead to a more effective utilisation of cash flow and increased market capitalisation.

IOC holds 53.58 per cent in IBP, while 12.21 per cent is held by institutional investors and 34.21 per cent by the public.

The company had acquired the government's 33.58 per cent stake in IBP in 2002 and subsequently bought another 20 per cent through an open offer. The government sold its remaining 26 per cent in IBP through a public offer in March this year.

IOC's paid-up capital after the merger will increase to Rs 1,196 crore from the present Rs 1,168 crore. The government's equity in IOC will decrease by less than 1 per cent because of shares being allocated to IBP shareholders. At present, the government holds 82.03 per cent in IOC.

The 11.87 million IBP shares held by IOC would be transferred to a trust, Ramachandran said, adding that the IBP brand would be retained.

The merger will take about three months to be completed since it has to be approved by the government, the Securities and Exchange Board of India and the registrar of companies.

IBP, with about a 10 per cent share in diesel and a little over 8 per cent share in petrol sales in the country, is the smallest company in the oil retail business. IOC, with 40 per cent and 35.5 per cent share in diesel and petrol sales, respectively, is the largest firm in the business.

The IOC board had approved the merger proposal on April 28, saying two entities engaged in identical business of marketing of petroleum products would result in a conflict in operations.