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Photo: Deepak Salvi

ALL THOSE expecting to see the familiar figure of Mukesh Ambani to chair a crucial meeting of Reliance Industries last week were surprised to see noted corporate lawyer Mansingh L Bhakta instead. A director on the Reliance Board since 1977, Bhakta had briefly resigned because of the rivalry between the Ambani brothers. “Yes, I was agitated and I had resigned, but I am sure that Mr Ambani would be proud of what his sons have achieved today,” said Bhakta.

That set the tone for corporate India’s largest merger: between Reliance Petroleum (RPL) and the flagship Reliance Industries Limited (RIL). Already the country’s most valuable company by market cap, RIL will now have the world’s largest refining capacity, with over 1.24 million barrels per day of refining capacity, never mind the fact that the stock fell over three percent on Monday.

Serious investors, actually, looked beyond the kneejerk reaction, since there is consensus that the 16:1 swap ratio is a good one. “The swap ratio and valuation works very well for both,” says Sanjiv Agarwal of Ernst & Young, which looked at the market price, earnings potential, earnings multiple and asset base of both RIL and RPL stock.

The reason for the merger is clear: Mukesh Ambani wanted to limit pressure on RIL, at a time when excess capacity and declining earnings were hurting his bottomline. Citigroup, which conducted the fairness opinion (it decides whether the merger is fair for all parties) said in a note that the merger proves positive for RPL, reducing earning fluctuations. Says RIL Chief Financial Officer Alok Agarwal: “The merger gives us the ability to take on larger projects”.

RIL will also buy the five percent stake held by Chevron Corp in RPL for Rs 60 a share, at a cost of $261 million. Interestingly, the price per share in rupees being paid matches what the San Ramon, California- based company had paid in April 2006. The rupee has since declined about 15 percent, cutting the value of the investment by about $39 million.

RPL’s 580,000 barrels-a-day plant was commissioned on December 25, 2008, adjacent to the existing 660,000 barrelsa- day refinery owned by the parent. “The merger will help RIL better utilise RPL’s cash flows,” says analyst Vinay Nair of Khandwala Securities Ltd, adding that the merger will also help in sourcing crude for the integrated refinery and the marketing of gasoline and diesel globally.

That the merged entity will be huge is a given. Whether it becomes a juggernaut or a dinosaur, however, remains an open question.