RPL set to merge with RIL; boards meet on Monday

Written by Corporate Bureau | Mumbai | Updated: Feb 28 2009, 06:22am hrs
Mukesh ambani
Reliance Industries Ltd (RIL) on Friday said it would merge its wholly-owned subsidiary, Reliance Petroleum Ltd (RPL), with it to create an integrated behemoth in oil refining and petrochemicals. In a statement to the Bombay Stock Exchange, RIL said that the boards of the two companies would meet on March 2 to consider a scheme of amalgamation for the two companies.

The merger would catapult the entity among the worlds top 10 non-state refineries. As a polypropylene producer, the merged entity would the worlds fifth largest. The merged entity would also rank amongst the top 50 most profitable companies in the world.

The announcement on Friday surprised the market, though an eventual merger of the two companies was expected. RIL sources said markets ascribe higher valuation to integrated energy companies vis--vis standalone refiners, as the earnings volatility eases. Both companies are led by Mukesh Ambani as chairman.

Analysts expect the swap ratio to be in the range of 15 to 17 shares of RPL for every share of RIL, in line with the market price of the scrips. RIL dipped 1.97% to close at Rs 1,265.05 on the Bombay Stock Exchange on Friday. RPL was down by 1.23% to close at Rs 76.20.

RILs turnover for FY08 stood at Rs 1,39,269 crore. RPLs Jamnagar refinery began operations last December. It has not yet started giving financial statements. The combined refining capacity of RIL and RPL would be 1,240,000 barrels per day. Both companies have their refineries at Jamnagar in Gujarat. The RPL unit is a 100% export-oriented and can process 580,000 barrels a day. The RIL refinery has a capacity to process 660,000 barrels a day.

But RPLs business had been under pressure as refining margins have fallen across the globe. Deepak Pareek, an analyst with Angel Broking, said, The merger would increase RILs operational synergies. Its cost efficiencies would optimise fiscal incentives, enhance financial strength and flexibility. The merger would also eliminate transfer pricing issues. Another analyst said, The merger would help bring down the cyclicality of its business.

The company was demerged from RIL in January 2006 and it attracted investment from US energy giant Chevron Corporation, which picked up a 5% stake in April 2006 for Rs 1,320 crore. This was just before RPLs public issue of Rs 11,000 crore in the same year. RIL holds a 71% stake in RPL.

Chevron has the option of raising the stake to 29% by June 2009, but that looks unlikely because of a slump in demand for high octane fuels now.

Also, in its latest yearly statement of capital expenditure, Chevron did not mention any plans to hike its stake in RPL. Rather, it was planning to pull out of unprofitable ventures worldwide.

In a research report, Merrill Lynch had said that Chevron hiking its stake in RPL appears unlikely. If Chevron exercise its option of hiking stake, RILs stake in RPL would fall to 47%, below majority. This is one more reason Chevron hiking stake in RPL appears unlikely. It is likely to exit RPL by June 2009 as per the other option it has.

Making of a behemoth

Entity to be among worlds top 10 non-state refineries

Co will also be worlds fifth largest polypropylene maker

To rank amongst the top 50 most profitable companies

Combined refining capacity would be 1.24 million bpd

Swap ratio of 15-17 shares for every RIL share seen