By Manash Goswami, Bloomberg
New Delhi: Reliance Industries Ltd., which plans to spend $25 billion on oil, gas and supermarket projects, would stretch funding too far by pursuing a reported venture to acquire assets from Dow Chemical Co., analysts said.
The company run by billionaire Mukesh Ambani may boost debt to 130 % of its equity from 40 % now if it allies with Dow, according to Credit Suisse Group. The Mumbai-based company has declined to confirm or deny a Times of India report on 16 March that it may invest $12 billion for control of the venture with Dow, the biggest US chemicals maker.
India’s most valuable company has used record profits from the world’s third-largest oil refinery to fund exploration off India’s east coast and a retailing chain, while the nation’s biggest initial public offering last year helped Ambani pay for a second refinery. The scale of the reported transaction with Dow would mark a change in Reliance’s strategy.
“The financing aspect will have to be looked at carefully because, after all, they’re going out of the comfort zone,” said Viswanathan Vasudevan, who helps manage $200 million of Indian stocks at Aquarius Investment Advisors Pte. in Singapore. “That’s not really the way they have usually done business.”
Even without Dow, Reliance’s debt to equity ratio will rise to 87 % in 2009 as its boosts spending on exploration and retail, Credit Suisse wrote in a report on 20 March.
“This would raise the risk in the event petrochemical margins take a tumble” before an expected decline in 2009, the report said.
Dow Chemical shares on 15 March surged the most in four years on speculation the company will merge some assets with Reliance. Dow stock has gained 17 % this year, to $46.71 at yesterday’s close. Reliance’s shares have gained by 5 % to Rs1,348.65.
Reliance will get 59 % equity in the company to be created after Dow Chemical transfers its basic chemicals and plastics business to the new company.
Midland, Michigan-based Dow has no plans for a “big bang” transaction, though it is considering more than 60 deals to reduce fluctuations in earnings, Chief Executive Officer Andrew Liveris said on March 21.
Interest from private equity firms had driven up Dow’s valuation, making it too expensive, reversing its earlier prediction that Reliance may enter a venture with Dow. Reliance’s Mumbai-based spokesman Tushar Pania declined to comment.
Dow will move some assets into ventures with partners that have access to cheaper raw materials, Dow’s Liveris said on 21 March.
“Strategically it will be a good thing,” said Aquarius’s Vasudevan. “Reliance gets access to newer markets and production facilities, Dow gets access to cheaper feedstock and raw materials.”
A transaction may boost Dow’s shares to more than $50, HSBC Securities analyst Hassan Ahmed said in a 15 March report. That would value the company at more than $48 billion.
“A joint venture makes sense for Dow and Reliance,” said Gene Pisasale, a senior analyst at Mercantile Capital Advisors, which holds 513,000 shares of Dow. “India has enormous potential demand and a low-cost environment.”
Reliance could borrow about $6.5 billion for any investment with Dow, according to a Macquarie Securities Ltd. report on 19 March. The Indian company has $6 billion of treasury stock and a $3.7 billion sale of shares agreed with the Ambani-led group of shareholders that control the group, the report said.
Reliance Petroleum Ltd. last year sold a $300 million stake to Chevron Corp. and raised $600 million in an initial share sale to fund construction of a 580,000 barrel-a-day refinery next to Reliance’s existing 660,000 barrel-a-day unit. Reliance Industries last sold shares in 1995. Since then, the company’s profit has risen more than eightfold to Rs94 billion.
Reliance has generated sufficient cash to fund projects before. When Reliance built the first of its refineries in Jamnagar in 1997, the Rs250 billion investment was the equivalent of 14 years of cash flow. A similar investment in telecommunications in 2000 could have been covered by six and a half years worth of cash. By contrast, spending $12 billion on a venture with Dow is just triple Reliance’s annual cash flow.
Dow’s businesses may be difficult to split because most of its plants make the intermediates and the final product in the same location, analyst Sanjeev Prasad at Kotak Securities said in a 19 March note to clients. Dow’s plants have as many as 75 units on the same site, Prasad said. Reliance may not be able to take advantage of supplying cheaper raw materials because most of it is sourced locally, the report said.
Dow’s annual sales of polypropylene, a resin used in carpets, bottle caps and auto parts, are about $1.5 billion, with about half in Europe. About $2 billion in sales of polystyrene, a hard plastic used in packaging and Styrofoam, are equally distributed among the US, Europe and Asia-Pacific region. Total sales in 2006 were $49.1 billion.
Dow is the world’s largest maker of polystyrene, with 13 % of global capacity, according to Banc of America Securities. The company also is the world’s largest producer of ethylene, the most common petrochemical; polyethylene, the most common plastic; and chlorine and caustic soda.