The merger of Indian Petrochemicals Corp. Ltd (IPCL), in which it owns a 47.3% stake with itself is a prelude to Reliance Industries Ltd (RIL), India’s most valuable company in terms of market capitalization, “taking audacious steps in the global market,” according to an executive of the company.
“This merger will allow RIL to borrow more resources for the purchase of assets overseas without affecting the company’s balance sheet,” added the executive, who did not wish to be identified.
Mint learns that RIL has formed a core team that is studying petrochemical assets in various markets, each worth at least $1 billion (Rs4,400 crore). RIL acquired IPCL from the Union government in 2002, and Trevira, a European maker of high-value polyester, in 2004, but each of these acquisitions cost it less than $500 million.
The merger of IPCL and RIL will create a company with revenues of Rs1,01,486 crore and a net worth of Rs54,700 crore. IPCL’s assets of around Rs10,500 crore are under-leveraged because the company is almost free of debt.
Given the size of the possible acquisition, RIL will need more money than it will raise through the planned $3.8 billion issue of preferential warrants to chairman Mukesh Ambani and his associates.
Some of the money will come from the sale of six overseas exploration blocks. RIL has incorporated a 100% subsidiary in Dubai, Reliance Middle East DMCC, and, according to the executive, “will transfer ownership of these blocks” to it. The subsidiary, the executive added, could sell its stake in the blocks individually, or even consider an overseas listing.
According to a report by brokerage Macquarie Securities, RIL has outlined a plan a spend $19 billion in capital expenditure over the next few years across various businesses, which will triple its earnings over the next five years.
The merger, which will see shareholders of IPCL get one share of RIL for every five shares they own—the government owns around one million shares in IPCL—will help the Ambani-run company consolidate its hold over the erstwhile public sector firm, say analysts. Over the past two years, IPCL’s stock has risen 47%; in the same period, the benchmark index of the Bombay Stock Exchange, Sensex, has risen 88%.
The relative underperformance of the stock forced brokerages such as Motilal Oswal Securities, in October 2006, to recommend that investors sell the share (at a price of Rs304)
Ambani has said that the merger would create value through synergies and scale that will enhance the competitive advantage of RIL.
The merger, which will be effective from 1 April, will result in RIL’s share capital expanding by 4.31% to Rs1,453.6 crore from the present Rs1,393.5 crore. It will also result in a 1.7% dilution in the holding of Mukesh Ambani and his associates in RIL.