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Why RIL’s bid for Lyondell failed

Why RIL’s bid for Lyondell failed
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First Published: Wed, Mar 10 2010. 01 15 AM IST
Updated: Wed, Mar 10 2010. 11 32 AM IST
Mumbai: Court filings by LyondellBasell Industries AF give a blow-by-blow account of what went wrong with Reliance Industries Ltd’s (RIL) bid to buy the bankrupt Dutch petrochemical maker. India’s largest private sector firm by market valuation chased its marquee acquisition aggressively, sweetening its offer twice.
It could have been India’s largest cross-border acquisition, sealed laboriously over a span of nearly 16 weeks by RIL.
Instead, the story went awry. A filing by LyondellBasell in the US bankruptcy court in New York describes the five deal breakers that made the firm refuse RIL’s offer repeatedly—thrice between mid-November and early March.
An RIL official, who did not want to be identified as he is not authorized to speak to the media, said the oil-to-yarn and retail conglomerate “stopped short when the value proposition was tilted away” from it.
Queries emailed to RIL’s spokesman on Monday evening remained unanswered.
“The (original) plan presented less execution risk and RIL’s offer didn’t warrant a deviation from our plan to a more speculative one. They (RIL) had proposed synergies expressed as opportunities for increased profits, but that (argument) did not hold the same merit for us,” David Harpole, LyondellBasell’s spokesman, told Mint late Monday, hours after his firm submitted documents in the court saying RIL’s plan was “not higher and better” than its own and not worth assuming the “associated execution risk” for.
LyondellBasell had been accused earlier by a small fraction of creditors of not giving due consideration to RIL’s offer.
The Dutch firm outlined five “concerns” regarding RIL’s plans: RIL’s “insistence on having effective governance and shareholder control...even if it owned a minority of its equity and not pay(ing) a premium for that control”; “the dilutive effect” RIL’s direct equity infusion would have; “potential delay and associated costs” of entertaining its proposal; “lack of any mechanism to defray (such) risks of delay...”; and RIL’s “dependence on speculative and disputed future profit opportunities to argue that its proposal represents increased value”.
Mint could not ascertain RIL’s specific stance on these.
RIL first made a “preliminary, non-binding” bid for a controlling stake in LyondellBasell on 14 November at $12 billion (Rs54,600 crore), but was urged to better the offer. It raised its offer to $13.5 billion on 18 December, but again failed to woo the management.
LyondellBasell, meanwhile, had been gradually smoothening its hurdles. On 16 February, it announced reaching a settlement with its unsecured creditors—RIL’s strongest sympathizers, winning them over with a 50% higher pay out of $450 million, days before, the court filings say, RIL was supposed to “provide its final and best proposal.”
Many analysts wrote off RIL’s chances then, but it came back—a third and final time—to submit another offer on 21 February, which media reports pegged at $14.5 billion. LyondellBasell’s objections to RIL’s bid, however, stayed.
Analysts and investors have since expressed relief at the falling through of what they considered an over-priced deal. Goldman Sachs’ analysts Nilesh Banerjee and Nishant Baranwal, wrote on 2 March that “the bid not going through is a better outcome, as it saves RIL from getting drawn into a bidding war and thus potentially over-paying for the assets.” They added RIL needs to figure how to deploy $25 billion of excess cash it is expected to generate between fiscal year 2011 and 2014.
Angel Broking Ltd’s Deepak Pareek prefers RIL going for oil and gas exploration “upstream” assets than “downstream” petrochemical facilities.
Debunking possible claims of being hostile to RIL’s due-diligence efforts, LyondellBasell says in its court submissions it made “full teams available to guide in-person visits” to over 20 of their key facilities worldwide and dedicated “three full days of management time for face-to-face presentations.”
DEAL BREAKERS
• Reliance’s insistence on having effective governance and shareholder control over LyondellBasell, even if it owned a minority of its equity and did not pay a premium for that control.
• The dilutive effect of the purchase price associated with the proposed direct equity investment by Reliance.
• The potential delay and associated costs that would attend pursuing a Reliance proposal.
• The lack of any mechanism to defray the risks of delay such as postings of at risk funds.
• Reliance’s dependence on speculative and disputed future profit opportunities to argue that its proposal represents increased value.
Source: LyondellBasell’s court filings on 8 March
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First Published: Wed, Mar 10 2010. 01 15 AM IST