Citigroup Global Markets India – the Mumbai-based arm of the global investment bank which advised RPL on its merger with RIL – views Monday's merger of the two firms as an indication of how mergers and acquisitions (M&As) will get increasingly restricted to the domestic market and inbound deals. Sameer Nath, director and head of M&As at the investment bank, speaks to Abhineet Kumar on the rationale for the merger and its potential to create a much needed momentum in the investment banking industry for exploiting deals in this era of credit crunch and globally slowing economies...
What is the key benefit of RPL's merger with RIL?
The merger will yield strategic, financial and operational benefits to the shareholders of both RIL and RPL. Strategically, it will enhance RIL's position as one of the largest and most diversified energy majors globally. The upside from exploration and production that RIL offers can be extended to RPL. Then, financially, it is EPS- (earnings per share) accretive for RIL.
The merger is expected to reduce earnings volatility for RPL shareholders, and will enable them to participate in the full energy chain of RIL. Finally, in operational terms, the benefit will come from reduced costs by combining operations at one location.
Plus, there are additional synergies from economies of scale – the combined entity will be among the top ten private sector refining companies globally, the world's largest producer of ultra clean fuels at a single location, and the fifth-largest producer of polypropylene globally.
Why was RPL kept as a separate entity for so long, especially since the markets had already been speculating about the merger of the two firms for quite some time?
Large projects can carry significant (project) execution risk. When it was launched, RPL was set up as a separate subsidiary to 'ring fence' the more stable RIL from this risk.
Now RPL has executed the project very efficiently – on schedule and within budget. The market environment has also changed since RPL's IPO in 2006. But, most importantly, RPL has minimal residual project risk today.
How is the changing economic environment impacting Indian corporates' ability to access funds from overseas?
Theoretically, in tough times, big corporates get more funds, while the fight for more capital gets tougher for smaller companies. Loans are available for bigger corporates, but these are variable loans as against fixed rate loans.
When the markets stabilise, bigger corporates will have an option to raise money through bond issuances. Trading in interest rate futures will enable corporates to do more bond deals. With FIIs coming in, and retail and institutional clients also looking at bonds, we can expect stronger demand for bond issuances in well-structured, highly-rated instruments.
Indian corporates who went in for acquisitions in the last two-three years are facing pressure on covenants to repay loans. Is there a way out of this?
Indian corporates are increasingly involved in financial restructuring of some type – they are trying to renegotiate covenants and interest rates. Some companies may also consider selling non-core assets to raise cash, reduce overall leverage and strengthen their capital structure.
Isn’t this an opportunity for I-bankers? Are you looking for opportunities to get more deals?
Yes, this is an opportunity. But investment banks should propose comprehensive solutions to clients that are in their long-term interest, and not just opportunistic in the short-term.
How do you see the deal mix changing this year, especially since bankers are discovering opportunities that are different from what they had in the last three-four years?
The deal mix is getting skewed towards domestic consolidation, and inbound M&As. Outbound deals could be lower this year as compared to the last two years. Inbound deals are expected from the US, Europe and Japan.
