LyondellBasell deal to be value accretive for RIL

The proposed acquisition of LyondellBasell by Reliance, if it goes through, will be a winning bet for RIL as the company has enough cash reserves to fund the deal, which in turn will further boost its core businesses, say experts.

Analysts of leading global investment banks like Credit Suisse, Goldman Sachs, CLSA and Citi have said the RIL-LyondellBasell deal would be value accretive for the Indian petrochem giant, besides the deal comes at a time when valuations are still low following the global economic slump.

Credit Suisse in a research report said: "While it is still early days, such an acquisition is one way of using RIL's large cash, and increase earnings visibility beyond the ramp up of KG D6."

Echoing a similar note, CLSA said: "We would view the acquisition as positive if the total enterprise value remains below $12 billion. Reliance is adequately funded with $4 billion in cash and $8 billion in treasury stock besides access to extra leverage."

The bid if successful, would facilitate growth of RIL's core business as LyondellBasell has large petrochem capacities, good tech portfolio and JVs in the Middle East, while, RIL's petrochem business is mostly Indiacentric.

Goldman Sachs said, "This deal is different from India's previous big overseas acquisitions, because of the relative size of the companies, balance sheet leverage, bankruptcy of the acquiree, and global economy now recovering as against heating up."

The acquisition can be value accretive for RIL, Citi said, adding that LyondellBasell's additional debt of $6.5 billion will increase RIL's FY11 net debt/EBITDA, but "within manageable limits". Besides, RIL can use part of the $8 billion treasury stock to fund the equity portion.

Shares of RIL surged as much as 4 per cent today and witnessed an intra-day high of Rs 2,205 on the Bombay Stock Exchange. On the volume front also good momentum was seen as more than 8.63 lakh shares exchanged hands on the BSE.

RIL did not disclose the offer size, industry sources say its bid for LyondellBasell would be over $12 billion, making it the largest ever acquisition by an Indian firm.

The biggest-ever deal involving an Indian company so far is Tata Steel's takeover of European Corus for $12 billion.

More bidders for LyondellBasell are likely to emerge once the bankruptcy court approves the restructuring plan by February 2010.

In such a scenario RIL's early "non-binding bid" gives RIL a foot in the door. This non-binding letter may also allow RIL to conduct due diligence now – giving it more time to evaluate while the bankruptcy process completes.

CLSA further said the actual cash outflow will depend on the stake RIL seeks; at a 51 per cent this will be USD 6 billion. "At this total enterprise value, we estimate the acquisition to be cash EPS accretive from the first year."

"It will also likely allow RIL greater bargaining power in procurement & sales and introduce new products into RIL’s offering," Goldman Sachs said.