Ril Rpl Final
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IN T R O D U C T I O N OF
CO M P A N I E S
Reliance Industries Limited The Reliance Group, founded by Dhirubhai H. Ambani (1932-2002), is India's largest private sector enterprise, with businesses in the energy and materials value chain. Group's annual revenues are in excess of US$ 28 billion. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company and is the largest private sector company in India. Backward vertical integration has been the cornerstone of the evolution and growth of Reliance. Starting with textiles in the late seventies, Reliance pursued a strategy of backward vertical integration - in polyester, fibre intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production - to be fully integrated along the materials and energy value chain. The Group's activities span exploration and production of oil and gas, petroleum refining and marketing, petrochemicals (polyester, fibre intermediates, plastics and chemicals), textiles, retail and special economic zones. Reliance enjoys global leadership in its businesses, being the largest polyester yarn and fibre producer in the world and among the top five to ten producers in the world in major petrochemical products. Major Group Companies are Reliance Industries Limited (including main subsidiary Reliance Retail Limited) and Reliance Industrial Infrastructure Limite Reliance Industries Limited (RIL) is India's largest private sector company on all major financial parameters with a turnover of Rs. 1,39,269 crore (US$ 34.7 billion), cash profit of Rs. 25,205 crore (US$ 6.3 billion), net profit (excluding exceptional income) of Rs. 15,261 crore (US$ 3.8 billion) and net worth of Rs. 81,449 crore (US$ 20.3 billion) as of March 31, 2008
Reliance Petroleum Limited: Reliance Petroleum Limited ("RPL" or the "Company"), was set up to harness an emerging value creation opportunity in the global refining sector, one of India's largest private sector company with a significant presence across the entire energy chain and a global leadership across key product segments. Currently, RPL is subsidiary of RIL. RPL was formed to set up a greenfield petroleum refinery and polypropylene plant in the Special Economic Zone (SEZ) at Jamnagar in Gujarat. This global sized, highly complex refinery is being located adjacent to RIL's existing refinery and petrochemicals complex, which is amongst the largest and most efficient in the world, thus offering significant synergies. The commissioning of the RPL refinery catapults Reliance into the league of the largest refiners globally, both in terms of complex refining capacity and earnings potential. With the completion of the RPL refinery, Jamnagar has emerged as the ‘Refining Hub of the World’ with the largest refining complex with an aggregate refining capacity of 1.24 million barrels of oil per day in any single location in the world. The state-of-the-art, globally competitive RPL refinery has been completed in 36 months from concept to commissioning, which is a new benchmark for building a grass-root refinery of this scale and complexity. This refinery has been built with a significant capital cost competitive advantage. This record has been achieved in spite of the significant shortfall in engineering and construction resources that has impacted most other refinery projects globally. RPL achieved the milestone by leveraging the project management skills of the Reliance group together with world-class implementation partners like Bechtel, UOP and Foster Wheeler amongst others.
Merger Highlights: Merger Rationale: •
Unlock synergies from combined operations o Crude sourcing, o Product placement, o
Supply Chain Optimization
Greater flexibility in operations planning
Expansion of refined product range
Optimized utilization of secondary process units and infrastructure
Efficient utilization of combined cash flows
Integrated energy companies consistently get higher valuations vis-à-vis pure refiners; Mitigate Holding Company discount
RIL to enhance its competitiveness in energy value chain •
o Oil & gas, refining and marketing, petrochemicals, organized retail and developmental of SEZ o Wider avenues for fund deployment •
State of the art Refinery o Superior product slate with higher margins o Operating in cyclical industry
Merger Details: •
Under the terms of the proposed merger, RPL shareholders will receive 1 (one) share of RIL for every 16 (sixteen) RPL shares held by them.
The appointed date of merger of RPL with RIL is 1
April 2008. The takeover is
subject to approvals by the high courts at Mumbai and Ahmedabad.RIL will cancel its holding in RPL. •
Based on the recommended merger ratio, RIL will issue 6.92 crore new equity shares to the existing shareholders of RPL.This will result in a 4.4% increase in equity base from Rs 1,574 crore to Rs 1,643 crore. Consequently, the promoter holding in RIL will reduce from 49.0% to 47.0%
Advisors to the merger are as follows: o Valuation Advisors
Ernst & Young Pvt. Ltd. and Morgan Stanley India Co. Pvt. Ltd.
o Transaction Advisors :
JM Financial Consultants Pvt. Ltd. and Kotak Mahindra Capital Co Ltd.
• Fairness Opinion
DSP Merrill Lynch Ltd. (for RIL) and Citigroup Global Markets India Pvt. Ltd (for RPL)
• Legal Advisor
Amarchand & Mangaldas & Suresh A. Shroff
• Co. Tax Advisor
PriceWaterhouse and Coopers Pvt. Ltd.
• The proposed merger is subject to all necessary approvals. All other procedural aspects of the proposed merger, and the timetable for implementation, will be communicated separately. • In the list of world's largest refining companies, RIL will become the 17th largest firm after the merger. The list is led by Exxon Mobil with a massive 5.6 million barrels per day (mbpd), followed by Shell with 4.6 mbpd and Sinopec’s 3.8 mbpd refining capacities.
Why the merger? •
Given this context, the prime motivating factors for this merger appear to be to gain “dinosaur”-like size which will strengthen RIL’s balance sheet. In the short term, it may also help the company play down the expected under-performance in the current fiscal.
The way to look at the merger though is that it was always waiting to happen. There seem to be two main reasons why RPL was floated.
First, to get SEZ benefits, the refinery project had to be housed in a separate company. The refinery would not have been eligible for the tremendous benefits from its SEZ status had it been just a project on RIL’s balance-sheet.
It is not clear now though whether the merger will impact the SEZ benefits but statements by government officials seem to imply that there will be no issues on this score. Second, RIL will now be able to add a new, state-of-the-art refinery asset to its balance-sheet with just a tiny equity expansion. RIL holds 70.38 per cent of RPL’s equity now; Chevron holds 5 per cent with the balance 24.62 per cent with the public.
When the original RPL was merged in 2002, RIL shares accruing to itself by virtue of its direct 28 per cent holding in RPL were extinguished; only those held by group and associate companies, which were a small percentage, were transferred to a treasury trust.
Assuming that similarly, the 70.38 per cent shares held by RIL in RPL are extinguished; that Chevron’s holdings are bought back by RIL and extinguished; and assuming a share exchange ratio of 1:16 (based on Friday’s closing price of Rs 1,265 for RIL and Rs 76 for RPL), RIL will have to issue 6.92 crore fresh shares that will see its equity increasing from Rs 1,454 crore to all of Rs 1,522 crore!
While the number of shares issued could be marginally higher based on the exchange ratio, the fact remains that the addition to RILs equity will be nothing compared to what it might have been had the Rs 27,000-crore refinery project been executed on its books.
RIL has traditionally set up large capital-intensive projects under new companies to ring-fence itself from project risk.
This happened with the first Jamnagar refinery, also called Reliance Petroleum. Now that RPL is up and running, it doesn’t make sense to keep it separate.
RIL has not issued any statement. There is speculation that RPL is sitting on inventory losses and may need balance sheet support from RIL.
RPL enjoys a 7-year tax break while the export-oriented status of the first unit of the Jamnagar refinery, which is part of RIL, will expire soon.
Chevron bought a 5% stake in RPL in 2006. It had the option to increase it to 29% before July 2009, and the speculation was that the merger would follow. The nonexercise of this option hastened RIL’s decision to fold its 70% subsidiary into itself.
Derives synergies from combined operations — crude sourcing, product placement, supply chain optimization.
Impact of Merger Proposal: • RIL among top 10 private sector refining companies globally • RIL already earns two-thirds of its revenues from refining, an industry that is facing a multi-year cyclical downturn. This merger would double RIL's refining capacity, thereby making its non-refining revenues negligible. • Will own 2 of the world’s 3 largest, most complex modern refineries • Will be the world’s largest producer of ultra-clean fuels at a single location • Among 50 most profitable companies globally • Among five largest producers of Polypropylene • This will tie RIL's fortunes more closely to the refining cycle, which is globally entering a stage of depression.
• On the positive side, there will be a huge contribution to RIL's bottom line from sale of Krishna Godavari gas. • The company, which pays only a 11% minimum alternate tax, can now use the depreciation from RPL plant to lower the profit of the combined entity and save on tax. • The merger is unlikely to have any impact on the tax holidays enjoyed by RPL, since they are bestowed upon the refining unit operating inside the special economic zone, rather than on RPL as a company. • The tax benefits are expected to continue without any change. However, it will have an indirect beneficial impact due to the transfer of depreciation of RPL's plants to RIL's profit & loss accounts. • Merger can improve the product slate of RIL with more focus towards light and middle distillates. It could also facilitate access to various quality of crude oil globally thus minimizing cost. The product mix would be flexible enough to optimize production to earn better refining margins. • Cash generation out of RPL could be used to deploy in exploration business in long term rather than seeking support from external borrowing. Similarly short term working capital requirements for RPL could be fulfilled by surplus cash in balance sheet of RIL. Thus we believe this merger could
reduce cost of capital
Share Holding Pattern:
Held by RIL Subsidiaries
Banks and FIs
Dilution of Promoter’s stake in RIL:
o The promoter stake got diluted by 2% post merger for swap ratio of 1:16 and treasury share from RPL got extinguished. Thus treasury shares were maintained at 20 cr post merger.
All figures in Cr unless specified Numb er of shares RPL
Reliance stake (75.38%) Non promoter stake (24.62%)
No of RPL shares for 1 RIL share No of RIL shares to be issued to non promoter
Numb er of shares RIL(1)
Shares entitled to RPL shareholders(2) Trea sury shares cancelled(3) Total shares post merger(1+2-3)
28.13 21.20 164.22
Trea sury shares existing 12.7%(4)
Equity net of treasury earlier(1-4)
Equity net of treasury post RPL merger
Existing promoter stake
Post merger promoter stake Promoter dilution
Valuation: o The merger will unlock significant operational and financial synergies that exist between RIL and RPL. o It can improve the product slate of RIL. It could also facilitate access to various quality of crude oil globally thus minimizing cost. Company’s consolidated earning estimates are under review. o Company maintain his Outperformer rating on the stock with target price of INR 1540 for RIL; however, company’s conviction for upside potential has got stronger.
Thin Arbitrage for Traders:
Whenever a merger is announced and the swap ratio becomes public, the shares of the company typically trade at a discount to the implied swap ratio. The arbitrage opportunity in the extinguishing company's share depends on liquidity. The merger was announced after the closing bell on Friday and the swap ratio was declared before the opening bell on Monday. The swap ratio of 1:16 was the same ratio as the closing price of the two stocks on Friday 27 feb.2009, leaving no room for arbitrage. Investors and traders try to speculate on the swap ratio, which is usually announced a few days after the boards have approved the proposal. The deal will be effective from 1st April 2009.
1 Month avg. price
The merger ratio, therefore, is more likely to favour RIL than RPL. Again, speaking of history, RIL has set the swap ratios for earlier mergers at a CAGR of 8-10% from IPO price. RPL's IPO (in April 2006) was priced at Rs 60. The RPL share price on Friday was Rs 76 (exactly at 8% CAGR). A 10% CAGR would mean a share price of Rs 80
CMP RIL(fut.) RPL
Above 1240 Below 76
Recommend ation SELL BUY
No of Shares 1lot (300 shares) 4800 shares
How to benefit from the opportunity: One can sell the RIL April future above 1240 that amounts to be 3, 72,000 and at the same time can buy the 4800 share of RPL at the level of 76 or below that would amounts to be 3,64,800. That clearly gives the gain of 2% approximately. Thus arbitrage opportunity thus exists in the amalgamation to benefit the traders and investors.
We believe the deal is a win-win situation for both companies, as RIL will have improved Cash-flow, stronger Balance Sheet and lower cost of capital post merger.
For RPL shareholders, the merger is expected to reduce Earnings volatility and allows them to participate in RIL's full energy value chain.
Both the companies have lots of benefit and synergy between each other. The merger will unlock significant operational and financial synergies that exist between RIL and RPL.
It creates a platform for value-enhancing growth and reinforces RIL’s position as an integrated global energy company.
The merger will enhance value for shareholders of both companies. The merger is EPS accretive for RIL. Through this merger, RIL consolidates a world-class, complex refinery with minimal residual project risk, while complementing RIL’s product range. There will be further gains from reduced operating costs arising from synergies of a combined operation.