Update: Reliance, RPL announce 1:16 merger ratio

Reliance Industries Ltd (RIL), India’s largest company by market capitalization, has offered one share for every 16 held in Reliance Petroleum (RPL) as it seeks to merge its refinery subsidiary.

The merger will create a behemoth with a total refining capacity of 1.24 million barrels of crude a day, which is a quarter of the total complex refining capacity in the world.

RIL has set April 1, 2008 for the date of the amalgamation. The takeover is subject to approvals by the high courts at Mumbai and Ahmedabad.

RIL will issue 69.2 million new shares to shareholders of RPL in order to buy back the unit and will have 3.7 million shareholders after the merger. RIL’s equity capital will rise to Rs 1,643 crore and the promoter’ holdings will fall by 2 per cent to 47 per cent, the company said in a statement issued today.

Highlights of the merger

 

• Merger is India's largest ever
• RPL shareholders to receive 1 (one) share of RIL for every 16 (sixteen) shares of RPL
• RIL's holding in RPL to be cancelled. No fresh treasury stock created.
• RIL to be a top 10 private sector refining company globally
• RIL to become the world's largest producer of Ultra Clean Fuels at single location
• Merger to unlock greater efficiency from scale and synergies
• Merger to be EPS accretive
• RIL to have 3.7 million shareholders

Alok Agarwal, RIL’s chief financial officer, told reporters here today that no fresh treasury stock would be created and the parent’s holding in the petroleum unit would be cancelled. Almost 200 million existing treasury shares would continue, he added.

Click here to download the Press release

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.

For more details read: Reliance, RPL set to merge

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.

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.

For more details read: Reliance to buy Chevron stake

Rating agency Moody’s said the merger simplified the group's corporate structure giving RIL access to an additional 30 per cent of cash flow generation from RPL that it did not  currently have, for a small cash consideration.

RIL, which owns 70 per cent of RPL, will buy Chevron Corp’s 5 per cent stake in RPL for Rs 1,350 crore as part of the merger. The US oil major is reselling the shares at the same price it bought from RIL during the time of the public offering in April 2006.

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.

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 capacity.

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.

Citigroup Global Markets India advised RPL on the deal and Ernst & Young and Morgan Stanley India advised RIL valuation, the company said.