IPCL set to merge with Reliance Industries

Move to add more than Rs 11,000 crore to RIL's balance sheet.

Ending months of speculation, Reliance Industries today said it is considering merging group firm Indian Petrochemicals Corporation Ltd with itself.

The boards of both the companies will meet on March 10 to consider the plan, the companies said in a statement to the Bombay Stock Exchange after the markets closed for the day.

Reliance Chairman Mukesh Ambani and his associates will hold nearly 53 per cent stake in the merged entity after the conversion of preferential warrants. The promoters are in the process of subscribing to preferential warrants to scale up their stake by 4 per cent from 50.4 per cent.

"This merger was long overdue," said Kenin Jain, an analyst with ASK Raymond James. "It will complete the entire value chain of petrochemical products for Reliance. This augurs well for both the companies," he added. 
 

BIG GETS BIGGER Year Ended March 2006                                        (in Rs cr)
	Reliance Ind	IPCL	Merged entity
Net sales	80877.79	10884.78	91762.57
Net profit	9069.34	1163.75	10233.09
Total assets	76640.69	7732.09	84372.78
Reserves	48411.00	4681.92	53092.92
Net worth	46050.47	4930.97	50981.97
9 Month  2006-07
Net sales	79468.00	8519.00	87987.00
Net profit	8055.00	1047.00	9102.00
Market cap (March 7)	1,79,672.21	6996.83	1,86,669.04
P/E ratio	19.13	5.40	-
Close price (March 7)	1289.35	231.65	-
% Change	-0.77	-0.94	-
Promoter stake (%) on Dec 2006	50.62	46.64	-

Analysts said Reliance was supplying raw materials to IPCL, which then made final products for end-user industries like rubber.

"Post-merger, Reliance would offer end-to-end product solutions, which would give it a pan-Indian and perhaps Asian dominance," said an analyst. The merger could also result in substantial tax savings for the merged entity as Reliance buys certain products from IPCL and vice-ersa.

Analysts also said the merger may help Reliance increase its revenue from chemicals by as much as 4 per cent to 48 per cent of the total. IPCL uses naphtha made at the parent's refinery as feedstock to make chemicals.

On Wednesday, Reliance's stock closed 0.77 per cent down at Rs 1289.35, while IPCL closed 0.94 per cent down at Rs 231.60.

Based on the price to earnings method, analysts said one share of Reliance could fetch four shares of IPCL. On the other hand, by using the book value formula, the swap ratio would come to 1:2. But the market was abuzz over a swap ratio of 1:6.

The merger, if approved, would add more than Rs 11,000 crore to Reliance's balance-sheet and Rs 1,163 crore to its profit, based on IPCL's fiscal 2006 financials.

Reliance had paid Rs 1,491 crore to the NDA government in 2002 to take over 26 per cent of IPCL's equity. It came out with an open offer and increased its stake to 46 per cent. The government now holds 0.35 per cent in the company.

Last August, the Gujarat High Court had sanctioned the merger of six polyester manufacturing companies "" Apollo Fibres, Central India Polyesters, India Polyfibres, Orissa Polyfibres, Recron Synthetics and Silvassa Industries "" with IPCL, prompting speculation that a merger with Reliance Industries was on the cards.

Since Reliance took over India's second largest petrochemical company, IPCL's profitability as well as revenues have shot up substantially. During the nine-month period ended December 31, 2006, IPCL's net turnover increased by 14 per cent and profit after tax, 20 per cent.

Over the last few years, Reliance has been integrating its petrochemical business with IPCL, Nocil and SM Dyechem. In the process, it managed to take on competition from West Asian countries which enjoyed highly subsidised feedstocks and financial concessions. By 2008, Reliance has targeted to become the world's fourth largest producer of polypropylene.

Petrochemicals production accounts for 31 per cent of Reliance's revenue for the fiscal year ended March 31 2006.