Mumbai: Shares in energy major Reliance Industries rose to one-month highs on Monday as traders said its offer for bankrupt petrochemicals company LyondellBasell Industries was well timed and would help its core businesses.
Over the weekend Reliance said it had made a cash offer to buy control of LyondellBasell.
A deal would create one of the largest petrochemical firms in the world, and comes when valuations are still low following the global downturn and Reliance is cashed up, analysts said.
Sources have put the value of the deal at around $10 billion to $12 billion, which would be India’s second-biggest ever foreign takeover. In 2007, Tata Steel bought Corus for $13 billion.
However, the deal differs from other big overseas deals given the relative size of companies, balance sheet strength and bankruptcy status of the LyondellBasell, Goldman Sachs said in a research report.
“We have been noting that Reliance could pursue inorganic growth as we see no major projects lined up to consume about US$20 billion of excess cash flow for FY2011 to FY2014 after its committed capex,” Goldman Sachs said.
It would also mark a return of Indian firms to large-scale M&A, after the global credit crunch and economic downturn made it difficult for firms such as aluminium maker Hindalco and Tata Motors, which bought Jaguar Land Rover, to digest big deals made in 2007 and early 2008.
At 11.55 pm, Reliance, which has a 14% weighting in the main Mumbai index, was up 3.1% at Rs2,191. The main index gained 0.8%.
Reliance is India’s largest conglomerate with interests in petrochemicals, refining, oil and gas exploration, and retail.
Strong Cash Position
Reliance, which has a market value of $75 billion, has been looking to take advantage of low valuations to expand internationally. Analysts said it has more than required muscle to finance the deal.
It has $4 billion in cash, $8 billion in treasury stock that can be sold, and, if it doubled its current net debt-to-equity it could borrow another $10 billion, Macquarie said in a recent research note.
A deal would give Reliance greater bargaining power in sourcing, and a strong presence in the United States and Europe, and technology patents.
“The deal is not going to be negative prime facie, that is obvious. The only concern is what could be the drag on Reliance’s profits but that is offset by the global presence and others,” said Deven Choksey, chief executive at brokerage KR Choksey.
Reliance is aiming to attain global scale for its conventional energy platform -- petrochemicals, refining and oil and gas exploration -- and invest in its new businesses such as retailing and alternative energy, chairman Mukesh Ambani said last week at the annual meeting of shareholders.