Reliance Merger Wit RPL

Reliance & RPL Reasons This is about size, this is about diversification,” Agarwal said, adding the merger would give RIL the ability to take on projects much larger than done before. The merger would help in sourcing crude oil for the integrated refinery complex and aid marketing of fuels such as gasoline and diesel globally at a time when demand was slumping, Agarwal said. RIL said the merger would result in RIL operating two of the world’s largest, most complex refineries; emerging as the world’s fifth largest producer of polypropylene; and becoming the world’s largest producer of ultra clean fuels at a single location. The 1.24 million barrels per day refining capacity made at Jamnagar in Gujarat is the single largest refining hub in the world, beating Paraguana refinery in Venezuela.

RIL said the merger would unlock significant operational and financial synergies that existed between RIL and RPL. Through this merger, RIL consolidated a complex refinery with minimal residual project risk, while complementing RIL’s product range. There would be further gains from reduced operating cost arising from synergies of combined operations, RIL added The RPL refinery, which was commissioned on December 25, 2008, has so far earned $300 million revenue through early product deliveries RIL’s 33 million tonne per annum (mtpa) refinery at Jamnagar together with the newly built 29 mtpa export oriented SEZ refinery of RPL would make it the largest refining company in India. It would displace state-owned Indian Oil Corporation (IOC) with 50.7 mtpa refining capacit

Pre conditions The merger, however, did not help the stock price. Shares of RPL dropped as much as 8.3 per cent, but recovered to close 2.3 per cent lower at Rs 74.60. Parent RIL fell as much as 4.2 per cent before closing 3.84 per cent lower at Rs 1,217.4 on the Bombay Stock Exchange. The Sensitive Index dropped 3.7 per cent. Analysts said the ratio was slightly worse than the market expected. But the cancellation of treasury stock meant RIL’s earnings per share would go up. The stock tumbled today more because of global concerns, they said.

Post conditions

RIL officials said the company would continue its commercial relations with Chevron though both agreed to discontinue the equity participation. As per the agreement, Chevron was supposed to sign crude supply and product off-take agreement with RIL. But it did not happen as they wanted to exit from the investment in refining. RIL was now well prepared to buy crude and supply products and hence could go ahead alone,” the officials said. RIL’s absorption of RPL will be tax neutral for both the entities. “This merger is not about tax benefits. As far as taxation is concerned, the SEZ refinery is a separate undertaking. Both refineries will retain their tax benefits,” Agarwal said In the list of world's largest refining companies, RIL would replace Chevron to become the 13th largest firm. The list is led by Exxon Mobil with a massive 268 mtpa of refining capacity followed by Sinopec of China with 210 mtpa of refining capacity. PetroChina with 130 mtpa capacity is at 7th position

Info Mumbai: The Reliance Industries (RIL) board will meet on March 2 to consider merger with Reliance Petroleum (RPL). The merger is effective retrospectively from April 1, 2001. SP Tulsian, of sptulsian.com doesn’t see RIL-RPL merger news a reason to cheer for shareholders of Reliance Industries. According to him, RIL shares could rise by about Rs 50 or cross Rs 1,300. However, he was quick to add that this step will disappoint shareholders of Reliance Petroleum. "One can see the price correcting to about Rs 70 because ultimately everything depends on the conversion ratio, which is likely to hover between 18:1 and 24:1. It all depends on what stand Reliance Industries would take for extinguishment of their stake of 70% that they hold in Reliance Petroleum. If they go for extinguishment then it could be a better ratio of 18:1. If they go for non-extinguishment, then the ratio could be 24:1.” Future of RPL shareholders Tulsian gives an example of the state of RPL shareholders post merger:Book value of RIL shareholder as of March 31, 2009, which is likely to be the effective date of the merger, would be 700, while that of RPL would be Rs 30. How he arrived at book value: Reliance Industries has been in existence for the last 30 years. So there has been an accretion in the value of the fixed assets of the company, while RPL being a new company, there has not been much accretion. The project cost of RPL of Rs 27,000 crore can be taken at about Rs 30,000-33,000 crore as of today.

Therefore, a shareholder of Reliance Industries will be shouting if the ratio is anywhere more than 24 to 1 because that is the ratio working out, based on the book value. If market value is the criteria for swap ratio, it works out to about 16-17. Ratio would definitely be negative for RPL shareholders. Future of RIL shareholders Tulsian said that RPL itself is entitled under Section 10AA, therefore RPL’s profits would be exempted for the first five years being an EOU (Export Oriented Unit). “This merger is not being mooted or moved with a view to have any tax advantage because RPL as such is entitled, all its profits will be exempted for the first five years to the extent of 100% of Section 10AA being a 100% EOU.” Benefits Tulsian says, “RPL has an advantage of the higher Nelson Complexity also. They have Nelson Complexity of 14.7 against RIL which has 11.7, which will always be giving the merged entity an extra gross refining margin to the extent of USD 2 per barrel. So all these things definitely makes a synergy, may be in terms of increasing the capacity and saving slight payments and overhead cost.” Tulsian is of the view that RIL-RPL merger can easily increase the debt equity ratio, by 10 bps on the merged entity but this will definitely be EPS accretive for the merged entity as well. He explains, "May be the retail investors will feel depressed or may be nervous that their price will get corrected closer to anywhere between Rs 65 to Rs 70.” What should investors do? Tulsian said the merger definitely strengthens the case for making investment in Reliance Industries. He advises investors to get out of RPL. “One can really play blind and without taking a know of the merger ratio, one can get out from RPL even if one gets the price of anywhere above Rs 70 and to move into Reliance Industries because before management does that conversion for investor, it is better to have that voluntary shifting from RPL to RIL on Monday itself.”