RIL, RPL merger swap ratio set at 1:16, Chevron sells RPL stake

Written by Corporate Bureau | Mumbai | Updated: Mar 3 2009, 06:38am hrs
Indias largest company, Reliance Industries (RIL), has formally decided on Monday to merge Reliance Petroleum (RPL) with itself. Simultaneously, US energy giant Chevron Corporation, which picked up 5% stake in April 2006 in RPL, has decided to exit. RIL will purchase the Chevron stake for around $270 million (Rs 1,377 crore).

The boards of RIL and RPL approved the merger, thus, creating the worlds largest refining capacity at a single location and the worlds fifth largest polypropylene manufacturer. The merger is with retrospective effect from April 1, 2008. The decision is in sync with the pattern at RIL which has merged every company it created, with itself later on.

As per the merger terms, RPL shareholders will get one RIL share for every 16 shares held in RPL. RIL will issue 6.92 crore shares to the shareholders of RPL, which will expand RILs equity base by 4.4%. Consequently, the promoters holding in RIL will fall from 49% to 47%.

Alok Agarwal, CFO, Reliance Industries, said, The integrated energy company would have higher valuations as against the stand-alone refiners. His comments were endorsed by rating agencies. Crisil affirmed an AAA rating for RIL, post the merger while Moodys too has affirmed it stood by the RIL ratings. Ivan Palacios of Moodys and lead analyst for RIL said, this is because there will be very little of cash outflow from RIL to pay for the buyout. The rating affirmation reflects the neutral impact of the transaction on the consolidated financial profile of the group, as the consideration will be paid primarily through issuance of shares.

The merger between RIL and RPL will give the benefit of combined operating profitability to the merged entity. RIL stands to benefit from the depreciation it could show for the RPL refinery to earn additional tax breaks. The valuation advisors to the merger were Ernst & Young and Morgan Stanley, while the tax advisor was PriceWaterhouseCoopers.

RIL shares were down 3.15% on the BSE on Monday to close at Rs 1,225.15. RPL closed at Rs 75.15, down 1.38%. Experts said the deal would benefit RPL shareholders more, since they have to swap only 16 shares to get an RIL share against the anticipated 20. Ajay Parmar, head of research at Emkay Global Financial Services said, The market had expected the swap ratio to be 1:20 after the news of the merger came in on Friday. If that was the case, RPL shareholders would have had to shell out more shares.

Official sources said RIL and RPL will have to inform the Board of Approval for Special Economic Zones and Export Oriented Units as well as the unit approval committee on the changes in the structure of the companies.

RIL currently has a refinery with the EOU status, while Reliance Infrastructure SEZ Ltd, a special purpose vehicle of RIL, has a unit of RPL in the SEZ as a refinery. Officials said there are no issues or complications here but is a mere formality of RIL and RPL following the procedures. They added that tax benefits to the SEZ cannot be merged with the main company.

RPL was demerged from RIL in January 2006. Chevron picked up a 5% stake in the refinery in April 2006 for Rs 1,320 crore, just before RPLs public issue of Rs 11,000 crore. Chevron had the option of raising the stake by another 24% by June 2009, but the global slowdown saw a slump in demand for high octane fuels and refining margins fell across the globe, dampening Chevrons interest.

Company sources said the split was a mutually agreed, and was meant to take on the impact of the changing global oil market dynamics. Chevron no longer required large quantities of the product in its system. Agarwal said it was Chevrons decision to exit RPL.