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RIL builds war chest, likely for Lyondell

RIL builds war chest, likely for Lyondell
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First Published: Tue, Jan 05 2010. 05 47 AM IST

Graphics: Ahmed Raza Khan/Mint
Graphics: Ahmed Raza Khan/Mint
Updated: Mon, Jan 11 2010. 05 46 PM IST
Mumbai: Reliance Industries Ltd (RIL) on Monday sold Rs2,675 crore worth of so-called treasury stock to institutional investors at an average price of Rs1,035 in what analysts see as an attempt to raise money for its next big move, either an acquisition of struggling European petrochemicals company LyondellBasell Industries AF or new greenfield projects.
Graphics: Ahmed Raza Khan/Mint
RIL is keen to acquire LyondellBasell to access new markets in Europe and the US and build scale to help it emerge a global player in petrochemicals.
The Mukesh Ambani-controlled firm has made a “preliminary” and “non-binding” bid for the bankrupt firm, which has filed a plan to reorganize with the US bankruptcy court in December as it evaluates an offer from RIL, pitting the Indian firm against lenders. Street estimates put the deal value at $10-12 billion (Rs46,500-55,800 crore), though RIL has not mentioned a bid amount.
Treasury stock are shares owned by a company in itself. RIL created treasury stock in 2002 when it merged with unit Reliance Petroleum Ltd.
This is the second time in four months that RIL has sold part of its treasury stock, which is held by its Petroleum Trust. “Reliance Industrial Investments and Holdings Limited, a wholly owned subsidiary of RIL, is the beneficiary of the trust. The sale of the said shares was executed in the stock exchanges today (Monday),” a statement from RIL said, explaining that the proceeds of the sale will go back to the company’s coffers.
DSP Merrill Lynch Ltd and Citigroup Global Markets India Pvt. Ltd were joint arrangers for the seller, as they were in September 2008 as well.
Life Insurance Corp. of India, already the largest institutional investor in RIL, was the buyer, according to a person familiar with the details of the transaction who did not wish to be identified.
RIL’s shares tumbled 1.29% on the Bombay Stock Exchange after the announcement to close at 1,076.35 on Monday even as the bellwether index Sensex ended the day nearly flat posting a rise of 0.54% to close at 17,558.73 points.
Analysts explained that the drop in RIL share prices was not an indication of investor fears. “When the treasury stock is sold, there is a sudden oversupply of RIL shares in the market and the big buyers don’t buy aggressively. This depresses the price (in the short term) but is not a statement on sentiments,” said Ravindra Nath, vice-president, equity, at Mumbai-based brokerage Asit C Mehta Investment Intermediates Ltd. Another sector analyst at the Indian arm of a foreign brokerage, who did not want to be named, concurred that it could just be a temporary blip.
Last year, RIL’s “Trust” had undertaken similar fund raising efforts, selling 15 million shares at an average price of Rs2,125 a share to raise around Rs3,188 crore for the energy firm.
After selling 25.9 million shares in the latest transaction, the Trust still holds 153.4 million treasury shares worth about Rs16,500 crore at Monday’s closing share price.
Experts said that while funding the LyondellBasell acquisition was arguably one of the most likely motives behind this fund-raising exercise, it may not be the only one.
In September, the company was categorical that its treasury stock sale was to enable it to make substantial investments. Monday’s RIL statement, in contrast, was silent on this issue.
“The company seems to be selling its treasury stock piece-meal and is clearly intent on big investments and big acquisitions. However, there need not be a one-on-one correlation of this (share sale) to LyondellBasell,” said the analyst at the Indian arm of the foreign brokerage cited in the first instance.
The person familiar with the transaction confirmed this: “Chapter 11 (bankruptcy) deals normally involve a lot of back-end negotiations and discussions. RIL needs to convince the LyondellBasell management that its offer is better than their current scheme of reorganization. It is boosting its war chest but that may or may not be for this deal.”
Statements put out by rating agencies after RIL’s bid for LyondellBasell became public, however, were far more categorical. Risk rating firm Crisil Ltd, in a 24 November statement, said it was reaffirming its top-notch AAA rating on RIL’s debt “consequent to ...(its) discussions with RIL’s management”.
“RIL’s majority ownership in LBI (LyondellBasell) will be funded without any additional debt on the books of RIL... Existing cash and sale of treasury stock will be used for the purpose of funding the acquisition”, the Crisil note had said citing its takeaways from discussions with RIL.
Another rating agency, Standard and Poor’s (S&P), was more cautious in a statement made the same day, but yet spoke of a treasury stake sale to fund the overseas buyout.
“The acquisition would weaken Reliance Industries’ metrics even after factoring in the company’s cash and cash equivalent of about $4 billion as on 30 September. However, we believe that its financial risk profile could change if competitive bidding from other interested companies increases the bid price, or the company sells some of its treasury stocks,” S&P’s credit analyst Yasmin Wirjawan was quoted as saying.
Financing is not the most thorny issue RIL will need to thrash out in its acquisition attempt. In recent weeks, the LyondellBasell management has gone ahead and filed its earlier reorganization plan to the US bankruptcy court in New York, effectively snubbing the RIL offer.
RIL’s proposal is being supported by a small clutch of unsecured creditors but the court is yet to decide if it wants to hear an alternate plan before it.
Clarity on this is expected to emerge on 12 January when the court hears the matter again. Until then, RIL could be keeping its pockets filled, just in case.
Pooja Thakur and Rakteem Katakey of Bloomberg contributed to this story.
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First Published: Tue, Jan 05 2010. 05 47 AM IST