'This is about size,' says RIL's chief financial officer.
Reliance Industries Ltd (RIL), India’s largest company by market capitalisation, has offered one share for every 16 held in Reliance Petroleum (RPL) to merge its refinery subsidiary.
RIL will issue 69.2 million new shares to shareholders of RPL in order to buy back the company and will have 3.7 million shareholders after the merger. RIL’s equity capital will rise to Rs 1,643 crore and the promoter’s holdings will fall by 2 per cent to 47 per cent, the company said in a statement issued today.
| WHY THE MERGER? |
| * Creates one-fourth of the world’s total complex refining capacity |
| * Becomes the world's single-largest refining hub |
| * Becomes the world's 17th largest refining company |
| * Becomes the world’s fifth largest polypropylene producer |
| * Derives synergies from combined operations — crude sourcing, product placement, supply chain optimisation |
| * Acquires flexibility in operations planning, higher utilisation of combined cash flows |
Alok Agarwal, RIL’s chief financial officer, told reporters here today that no fresh treasury stock would be created and the parent’s holding in the petroleum unit would be cancelled. Almost 200 million existing treasury shares would continue, he added.
RIL’s absorption of RPL will be tax neutral for both the entities. “This merger is not about tax benefits. As far as taxation is concerned, the SEZ refinery is a separate undertaking. Both refineries will retain their tax benefits,” Agarwal said.
“This is about size, this is about diversification,” Agarwal said, adding the merger would give RIL the ability to take on projects much larger than done before.
RIL has set April 1, 2008 for the date of the amalgamation. The takeover is subject to approvals by the high courts at Mumbai and Ahmedabad.
Analysts were not surprised st the merger as RIL has played the merger game quite often in the past. All of RIL’s subsidiaries involved in refining or petrochemicals in the past have eventually been merged with RIL. 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.
Also, RIL acquired petrochemical company IPCL in FY03 as part of the government’s disinvestment programme. IPCL was merged with RIL in FY07. Several other petrochemical companies either promoted by RIL or acquired by it have eventually been merged with RIL.
The latest merger, which was announced after early morning board meetings today, will create a behemoth with a total refining capacity of 1.24 million barrels of crude a day, which is a quarter of the world's total complex refining capacity.
The merger would help source crude oil for the integrated refinery complex and aid marketing of fuels such as gasoline and diesel globally at a time when demand was slumping, Agarwal said.
RIL said the merger would result in RIL operating two of the world’s largest, most complex refineries; emerging as the world’s fifth largest producer of polypropylene; and becoming the world’s largest producer of ultra clean fuels at a single location.
The 1.24 million barrels per day refining capacity made at Jamnagar in Gujarat is the single largest refining hub in the world, beating Paraguana refinery in Venezuela.
The merger, however, did not help the stock price. Shares of RPL dropped as much as 8.3 per cent, but recovered to close 2.3 per cent lower at Rs 74.60. Parent RIL fell as much as 4.2 per cent before closing 3.84 per cent lower at Rs 1,217.4 on the Bombay Stock Exchange. The Sensitive Index dropped 3.7 per cent.
Analysts said the ratio was slightly worse than the market expected. But the cancellation of treasury stock meant RIL’s earnings per share would go up. The stock tumbled today more because of global concerns, they said.
Rating agency Moody’s said the merger simplified the group’s corporate structure, giving RIL access to an additional 30 per cent of cash flow generation from RPL that it did not currently have, for a small cash consideration.
RIL, which owns 70 per cent of RPL, will buy Chevron Corp’s 5 per cent stake in RPL for Rs 1,350 crore as part of the merger. The US oil major is reselling the shares at the same price it bought from RIL at the time of the public offering in April 2006.
RIL officials said the company would continue its commercial relations with Chevron though both agreed to discontinue the equity participation. As per the agreement, Chevron was supposed to sign crude supply and product off-take agreement with RIL. But it did not happen as they wanted to exit from the investment in refining. RIL was now well prepared to buy crude and supply products and hence could go ahead alone,” the officials said.
RIL said the merger would unlock significant operational and financial synergies that existed between RIL and RPL. Through this merger, RIL consolidated a complex refinery with minimal residual project risk, while complementing RIL’s product range. There would be further gains from reduced operating cost arising from synergies of combined operations, RIL added.
The RPL refinery, which was commissioned on December 25, 2008, has so far earned $300 million revenue through early product deliveries.
RIL’s 33 million tonne per annum (mtpa) refinery at Jamnagar together with RPL's newly built 29 mtpa export oriented refinery would make it the largest refining company in India. It would displace state-owned Indian Oil Corporation (IOC) with 50.7 mtpa refining capacity.
In the list of world's largest refining companies, RIL will become the 17th largest firm after the merger. The list is led by Exxon Mobil with a massive 5.6 million barrels per day (mbpd), followed by Shell with 4.6 mbpd and Sinopec’s 3.8 mbpd refining capacities.
Citigroup Global Markets India advised RPL on the deal and Ernst & Young and Morgan Stanley India advised RIL valuation, the company said.
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Feb 28: Reliance, RPL set to merge
