Mumbai: The attempt by India’s most valuable company Reliance Industries Ltd (RIL) to acquire bankrupt chemicals maker LyondellBasell Industries AF, if successful, will help boost revenue and reinforce its bargaining power with suppliers and customers, analysts said on Sunday.
But such an acquisition would bring limited value to RIL’s business in India, which has sufficient domestic capacity to meet demand, one analyst said.
RIL said on Saturday evening that it had submitted “a preliminary non-binding offer to acquire, for cash, a controlling interest” in Rotterdam, Netherlands-based LyondellBasell, without disclosing financial terms. Conditions include LyondellBasell’s emergence from bankruptcy proceedings, “conduct of due diligence, documentation and receipt of sufficient creditor support”.
If it materializes, the acquisition would be the first marquee overseas asset purchase by the oil-to-yarn conglomerate, owned by India’s richest man Mukesh Ambani. The offer is in the vicinity of about $10-12 billion (Rs46,600- 55,920 crore), Reuters cited a person with direct knowledge of the offer as saying. A second person said the offer was around the upper end of the band, the wire service reported, without naming the two persons.
RIL 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 Ambani said last week at the company’s annual meeting of shareholders. “RIL has no new projects lined up after commissioning its new (Jamnagar) refinery and KG (Krishna-Godavari) D6 (gas block) and this acquisition will at least prop up the top line,” said Maulik Patel, head of research at Mumbai-based brokerage KR Choksey Shares and Securities Pvt. Ltd. “Besides making it a global player in petrochemicals, it will also substantially add to the distribution network of RIL.”
An industry executive close to the deal said that the acquisition, if it materializes, will give the energy firm “much larger negotiating power with suppliers and customers” as well as add about half a dozen new petrochemical products to RIL’s product line-up.
Patel calculates that RIL can raise up to $11 billion keeping its debt to equity ratio one-to-one. It has $4.2 billion in cash and cash equivalent,?and about $8.6 billion of unsold treasury stock, giving it a total and “ample elbow room” of $23.8 billion, he said. This would be far in excess of the $10-12 billion offer mentioned in the Reuters report, which said Bank of America Merrill Lynch was among the advisers to RIL.
LyondellBasell, a maker of plastics such as polypropylene and polyethylene, was formed in December 2007 when Basell AF paid $12.7 billion for Lyondell Chemical Co., which declared bankruptcy 13 months later. The firm, which has a crude oil refinery and other operations in Houston, is a unit of New York-based Access Industries Holdings Llc, founded by billionaire Len Blavatnik.
Lyondell Chemical and other US affiliates of LyondellBasell Industries filed for bankruptcy in January. Lyondell Chemical had assets of $27.1 billion, debt of more than $19.4 billion and more than 25,000 creditors, according to the petition filed in US Bankruptcy Court in Manhattan.
“I’m not very excited about RIL acquiring a chemical company. You can’t sell LyondellBasell’s products in the country as domestic capacities are sufficient; as for global markets, you will be selling the same products to the same customers and buying the same feedstock that they (LyondellBasell) were anyway buying...so where’s the value addition?” said a Mumbai-based analyst with a foreign brokerage, who did not want to be named. “It is just an asset on the cheap. Another question is how much debt RIL is going to take on its books and how much of a haircut LyondellBasell’s lenders will be willing to take.”
The attempt to acquire LyondellBasell, if successful, could “bump up RIL’s ranking” a few notches in Asia’s energy rankings, according to Vandana Hari, Asia news director for oil and gas at global energy statistics tracking firm Platts. RIL currently ranks fourth in Asia behind three Chinese firms based on assets, return on capital employed and profits, among other financial parameters.
“This is and has been a good time to buy for companies that are forward looking, are not concerned with the immediate downcycle in the refining segment and have been making domestic investments for a while anyway. RIL fits the bill,” said Hari. “Those late now will again be chasing expensive assets a few years later.”
Another analyst with the Indian arm of a foreign brokerage said that most energy companies were strategically getting out of, or de-emphasizing, the petrochemicals business, and the sector would be under-invested in the West.
“If you are getting the distribution network for a song, then why not? If anybody can pick this (LyondellBasell) up, it is RIL,” said the analyst, who didn’t want to be named.
Reuters and Bloomberg contributed to this story.