Chemistry lesson

Lyondell: There’s no sign of chemistry between Reliance Industries and LyondellBasell. The Indian oil and petrochemicals group has already increased its offer for the bankrupt US chemicals group. It could afford to go higher. Some creditors would be tempted by a $15.5 billion offer. But there’s no certainty despite the high price. Reliance, which is known for not over-paying, should take its experiment elsewhere.

At the current offer price of $14.5 billion, Reliance — controlled by Mukesh Ambani — is already valuing Lyondell at a hefty 10 times 2010 forecast Ebitda. Dow Chemical, one of few reasonable benchmarks, trades on a multiple of just over eight times. Admittedly Lyondell’s earnings are at the bottom of the cycle, but a multiple of between 5.5 and six times would be more normal.

Lyondell’s own adviser, Evercore, has put a $13.5 billion to $15.5 billion enterprise value range on the company. The company’s creditors appear to have rejected Reliance’s latest offer in favour of seeing through the ongoing Chapter 11 process, which promises to reward them with equity in Lyondell and see its debts cut from $20 billion to just above $5 billion.

More of the creditors might go for a Reliance bid at the top of Evercore’s range. But much depends on private equity group Apollo, Lyondell’s biggest creditor.

The investment firm might bite — but equally it might fancy its chances trying to orchestrate a post-bankruptcy merger of Lyondell with Hexion, the chemicals group it owns. With merger synergies, there might be a case for putting an even higher price tag on Lyondell.

Also, some of Lyondell’s jewels could be sold when it emerges from bankruptcy. Several parts — including its licensing and catalyst business or its refining joint ventures in the Middle East — could command juicier multiples than the group as a whole. That’s another possible reason for Lyondell’s creditors to hold out for more.

Reliance, though, needs to be cautious. Cash isn’t a problem — the company has raised around $2 billion from its own shareholders and has some $7 billion in treasury stock it could use.

Reliance can also call on banks for funding. But Ambani, India’s richest man, is known for making opportunistic purchases at bargain prices. That chance appears to have passed at Lyondell. He should move on.