| Downstream gains |
| Sarath Chelluri / Mumbai November 30, 2009, 0:03 IST |
By making a bid for LyondellBasell’s assets, Reliance seems to be getting serious about the global petrochemicals business.
When Reliance Industries sold treasury stocks of Rs 3,188 crore in September 2009, analysts were suggesting that the company would invest the proceeds in a global acquisition. These expectations do not seem unfounded now. Not even a week had elapsed since Reliance Industries’ Annual General Meeting that things started rolling as the company firmed up its plans to acquire a controlling interest in the bankrupt petrochemicals company LyondellBasell Industries (LBI).
LyondellBasell was created from a merger of Basell and Lyondell in 2007. Basell was the one of the largest chemical companies situated in Europe, and is one of the largest producers of polypropylene and polyolefins products. Lyondell was one of North America's largest producer of chemicals and plastics, and a refiner of heavy and sulphur crude oil. Although it’s still premature, the big-ticket investment is termed as the most expensive buy-out done by an Indian company, valued at about $10-12 billion or around Rs 50,000 crore. The deal, if it goes through, would create a global energy and chemicals giant with nearly $ 75-80 billion in combined revenues, which is more than twice RIL’s FY09 revenues.
What’s in it?
With LBI’s revenues of $50.7 billion, being almost five times that of RIL’s petrochemical revenues, the acquisition has the potential to make RIL a leading global petrochemical company. The deal comes at a time when asset valuations in the Western markets are relatively lower as the global economy would need more time to come out of the woods completely.
| FINANCIAL SNAPSHOT | ||||
| in $ billion | LyondellBasell | Reliance Inds | ||
| CY08 | H1 FY09 | FY09 | H1 FY10 | |
| Revenue | 50.7 | 13.4 | 32.9 | 17.5 |
| EBITDA | -4.1 | -0.5 | 12.0 | 3.2 |
| Net profit | -7.6 | -1.4 | 3.3 | 1.6 |
| Assets | 28.7 | 28.2 | 53.7 | 49.0 |
| Gross debt | 24.0 | 15.5 | 16.6 | 14.7 |
| Other liabilities * | - | 12.0 | - | - |
| Net worth | -6.1 | -7.5 | 26.1 | NA |
| * subject to compromise Source: Company | ||||
Deepak Pareek, analyst, Angel Broking, “On account of a global economic slowdown and the decline in margins in the petrochemical segment, there has been a steep decline in replacement costs and asset values. Hence, the timing of the deal seems fair from a valuation perspective. With this backdrop, RIL is likely to press hard for an attractive bargain, which, in turn, could mean even better valuations.”
At cheaper valuations, buying a facility would make more sense for RIL compared to setting up a new plant as it would involve a long gestation period and higher opportunity cost. So strategically, a purchase like LBI is perfect.
With LBI, RIL can grow from a dominant domestic petrochemical player to an important global player though it is difficult to ascertain a specific figure in terms of market share increase as both companies are present in diverse products. Besides, the acquisition would allow it to gain access to LBI’s main markets of the US and Europe. With LBI being a technology-leader in polyolefins, the acquisition would enhance RIL’s technological advancement in RIL’s domestic operations. As a combine, both companies could enjoy a global monopoly in the polypropylene and polyethylene segments.
However, Vishwas Katela, analyst at Anand Rathi Securities, cautions: “A global acquisition of the size of LBI would mean that RIL will have to manage operations not across few countries, but across continents.”
| GLOBAL PEER COMPARISON | ||||||
| in $ billion | Mkt Cap | EV |
Sales CY09E (1) |
EBITDA CY09E (2) |
EV / CY09 Sales |
EV / CY09 EBIDTA |
| Akzo Nobel | 14.6 | 18.2 | 20.4 | 2.5 | 0.9 | 7.1 |
| Arkema | 2.4 | 3.0 | 6.6 | 0.5 | 0.5 | 6.1 |
| BASF | 54.4 | 74.5 | 73.9 | 10.2 | 1.0 | 7.3 |
| Celanese | 4.2 | 6.5 | 4.9 | 0.9 | 1.3 | 7.4 |
| Dow Chemical | 31.9 | 57.6 | 43.7 | 5.2 | 1.3 | 11.1 |
| Dupont | 31.2 | 39.8 | 25.4 | 4.1 | 1.6 | 9.7 |
| Huntsman | 2.1 | 4.7 | 7.4 | 0.5 | 0.6 | 9.6 |
| Westlake Chemical | 1.8 | 2.0 | 2.3 | 0.2 | 0.9 | 10.2 |
| Average | - | - | - | - | 1.0 | 8.6 |
| Reliance Inds | 79.8 | |||||
