In an action replay after seven years, Mukesh Ambani-promoted Reliance Industries (RIL), the country's largest company by market capitalization, today unveiled its plans to merge its group firm Reliance Petroleum (RPL) with itself.
RIL as well as RPL informed the Bombay Stock Exchange today that it would hold separate board meetings on March 2 to consider the merger.
RIL’s existing refinery was earlier in a separate company also named Reliance Petroleum. This company, which started operations in FY01, was merged with RIL with effect from March 2002.
If the latest merger is approved by the boards, the market capitalization of the combined entity will be Rs 2,33,000 crore at today’s closing price on the BSE. RIL’s market cap now is Rs 1,99,093 crore.
As on December 2008, promoters hold 49 per cent stake in RIL and 70.38 per cent stake in RPL. US major Chevron, which holds 5 per cent stake in RPL, has got an option to raise it by 24 per cent by July 2009. But analysts said this was unlikely now, and Chevron will exit the company at Rs 60 a share.
Analysts said RPL shareholders would benefit in the long term from the merger with RIL as they could gain from RIL’s other diversified businesses. Reacting to the announcement, the government said it did not see any immediate issues with the merger proposal. "There should be no legal issues," Petroleum Minister Murli Deora said in New Delhi.
"The merger will not affect the export-oriented unit status of Reliance Petroleum," Commerce Secretary G K Pillai added.
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RPL has claimed an annual crude processing capacity of 5,80,000 barrels per day, making it the sixth largest refinery in the world.
Sources close to the company said that the deal was mainly to enhance RIL’s position as an integrated energy major. The markets generally ascribed higher valuation to integrated energy companies compared to standalone refineries due to better competitive position and reduced earnings volatility, they added.
The sources said the merger would catapult RIL among the world’s 50 most profitable companies; top 10 non-state owned refining companies; top 15 independent upstream companies and the fifth largest producer of poly-propylene.
With the merger, RIL will have enhanced weightage in domestic indices. RIL will also gain significantly from higher financial strength and flexibility from the merger, which is likely to be earnings accretive for RIL from the first year itself.
Analysts were not surprised with the latest move as all of RIL’s subsidiaries involved in refining or petrochemicals in the past had eventually been merged with RIL.
Back in 2002, when RPL was merged with RIL, the swap ratio was fixed at 1:11 that is for every one share of RIL, 11 RPL shares.
SP Tulsian, independent equity advisor, said RIL shares could even cross Rs 1,300 next week, while RPL's price can correct to about Rs 70, as ultimately everything depends on the conversion ratio, which was likely to be in the range of 1: 18 to 1;24.
If RIL extinguishes its stake of 70 per cent in RPL, the merger ratio could be 18:1; otherwise it would be be 24:1.