How Reliance Won IPCL

Updated: May 25 2002, 05:30am hrs
The place: Maker Chambers IV, Nariman Point, Mumbai. With barely a few days to go for submission of bids for Indian Petrochemicals Corporation Limited (IPCL), Reliance Industries Ltd (RIL) vice chairman and managing director Mukesh Ambani and managing director Anil Ambani are closeted in their sprawling fourth-floor office. The Ambani brothers were pouring over the price and the details that the companys financial advisors had just submitted to them. This was the price recommended at which RIL should bid for IPCL.

Mukesh Ambani, Vice Chairman & Managing Director (left), and Anil Ambani, Managing Director, Reliance Industries Ltd.
After doing some quick calculations, the two brothers decided that they should up the price suggested by the financial advisors. After a short while, chairman and patriarch Dhirubhai Hirachand Ambani joined the brothers.

He scrutinised the figures and then gave the brothers a brief message in a sombre tone: Reliance is known for winning. But, today doubts are being cast over our ability to win (after losing out in the race to acquire IBP and VSNL in the disinvestment process). Doubts are being raised by our shareholders, employees, individuals and even our well wishers. We have to get back to our winning ways.

The seriousness and the way of the future had been given to the two brothers with crystal-clear clarity. In their own parlance, it was understood amongst the brothers that their father had put an emotional premium on IPCL acquisition. Reliance had to get it right this time.

ROAD AHEAD

Formation of the new board
Remove bottlenecks in feedstock supply
Rationalise product portfolio
Revamp marketing operations
Implement a major IT initiative
Carry out major financial restructuring

Clearly, it had been eyeing IPCL too long to let it slip out of its hands. But they also realised that it would not be an easy game. As the countdown to the IPCL acquisition began, it came under relentless attack from its corporate and political rivals.

On its part, Reliance also decided to pull out all stops. Shiv Sena supremo Bal Thackeray on April 27th 2002 wrote a letter to Prime minister Atal Bihari Vajpayee passionately championing the cause of Reliance, signing off the letter with an Always Yours. Mr Thackeray had also brought into the picture the three Central ministers Suresh Prabhu, Manohar Joshi and Balasahib Vikhe-Patil. Key amongst others who wrote in favour of Reliance was MP Praful Patel and Samajwadi leaders Mulayam Singh Yadav and Amar Singh.

Even as the pro and anti lobbies were still at work, the meeting of the inter-ministerial group (IMG) was convened on May 16. Representatives of all the three biddersReliance, Indian Oil Corporation (IOC) and Nirma were invited. There was palpable tension on everyones face. Disinvestment ministry secretary Pradip Baijal opened the bids, keeping an inscrutable face, in the presence of representatives of Reliance, Nirma and Indian Oil Corporation (IOC), the three bidders in the race. We will get in touch with you, is all he said.

The committee of secretaries (CoS) was to meet the very next day to take up the bids. The veil of secrecy was so strict that Mr Baijal did not even disclose the price bid by each company at the CoS meeting.

The government had decided to get over with IPCL disinvestment the same day. The meeting of Cabinet Committee on Disinvestment (CCD) was fixed on May 18, a Saturday when the government offices are closed.

Back at the headquarters in Mumbai, Reliance seemed to be equally in dark, though there were reports that day that RIL was seen winning the race with a bid price of around Rs 225-250 per share. Reliance, other wise known for its legendary skills at information gathering and influence in the corridors of power, however this time was still not sure of the final outcome. In fact, it kept two press releases ready for the media: one in case it gets IPCL and the other in case it didnt.

On D-day, at the Shastri Bhavan office of the Disinvestment ministry in the capital, the CCD meeting had lasted much longer than expected in a stormy one where external affairs minister Jaswant Singh, defence minister George Fernandes, petroleum minister Ram Naik and chemicals and petrochemicals minister SS Dhindsa opposed the sale of IPCL to Reliance.

Union Disinvestment minister Arun Shourie finally came out of the room. Reliance had been selected to acquire IPCL. It had decided to fork out Rs 1491 crore for a 26 per cent stake a price of Rs 231 per share. The second highest bidder IOC being way behind at Rs 128 per share while Nirma had bid just Rs 110.

From New Delhi, the news was flashed across to Dhirubhai Ambani and Mukesh Ambani, both of whom were at home. Anil Ambani was conveyed the message over the mobile phone in his car, as he had just left office for home. Reliance insiders confide that more than happiness, there was a sense of relief among the Ambanis and their top management. A four year old effort, marred by bitter corporate and political warfare, had just been finally won. Just why was IPCL so critical to Reliance

Product Synergies
Reliance believes IPCL is a natural ally. RIL will build a formidable market share of 50 to 95 in six product segments linear alkyl benzene (LAB), ethylene oxide, LLDPE/ HDPE, polypropylene (PP), polyvinyl chloride (PVC) and monoethylene glycol (MEG) after the acquisition.

Its market share in polymers (LLDPE/HDPE, PVC and PP) will go up to nearly 75-80 per cent. In the MEG segment, it will be a commanding 95 per cent while in LAB and ethylene oxide, its market dominance will rise to about 50 per cent and 70 per cent, respectively.

Says Anil Ambani, managing director, Reliance Industries Ltd., IPCL is a pioneer from the public sector in the Indian petrochemicals industry. Reliances acquisition of IPCL will add value for both companies, and lead to significant benefits of scale, enhanced market leadership, integration, operational synergies, cost reduction and productivity gains.

Today, questions are naturally being raised over the issue of monopoly and market dominance. On their part, RIL insiders, however, claim that the acquisition is highly unlikely to translate into a market dominance of the kind that will give the two companies a free hand on pricing of their products. Their argument: imports are freely allowed and global petrochemicals industry is in an oversupply position which means free availability of products and, therefore, no possibility of a shortage driven pricing.

Future Gameplan
IPCLs board of directors is expected to be completely revamped. The new board will comprise six nominees of Reliance, two nominees of government and four independent directors to be chosen by the board. The chairman will now be a non-executive post, to be nominated by Reliance, which will also appoint its own managing director.

Even though no formal
decision has been taken yet for the chairman and managing directors post, former IPCL chairman and MD, KG Ramanathan, who is now a director in Reliance Power and worked closely on the IPCL acquisitions, is now hotly doing the rounds.

The foremost job on the operations front will be to remove the bottlenecks in supply of feedstock. IPCL has been facing some problems with availability and pricing of feedstock which constitutes as much as 50-60 per of the cost of final product.

We want to first look at all the problem areas and make sure that feedstock is available freely. We will then look at improving operational efficiencies, consumption norms and raising the output by benchmarking them against RILs own standards, said a top official of Reliance. Adds P K Rudra, chairman of engineering consultancy major, Triune Projects and former chairman of Engineers India Ltd, There is scope for product rationalisation. Additionally, a major priority could be debottlenecking of some of the plants so that capacity utilisation can be enhanced.

On product profile, Reliance will identify the products and grades in which IPCL is superior. On the marketing front, it will work out the distribution network synergy. Today, there is lot of commonality of distribution. Reliance will also rework the policy of distribution and commissions structure paid to dealers.

The taxation structure will be improved by looking at issues like sales tax. Logistics rationalisation is another top priority.

Reliance will also implement a major information technology initiative at IPCL which will include implementation of SAP and MIS systems. Reliance has done a complete assessment of IT systems at IPCL and feels that there is a lot more work to be done, a well informed source said.

A major daunting task before the new management will also be the overhauling of IPCL financials structuring. We are looking closely at the entire financial structure of IPCL, especially its debt profile, said the source.

Clearly, even as Reliance is heaving a sigh of relief now that it has IPCL in the kitty, it also realises that there is a long road ahead to reap the full benefits of the acquisition.