Mumbai: India’s most valuable company Reliance Industries Ltd is set to merge its 46.64% owned associate Indian Petrochemicals Corp. Ltd (IPCL) with itself, in a move aimed at strengthening its balance sheet as it prepares to borrow several billion dollars to fund ambitious expansion plans in petrochemicals, oil and gas exploration and retail. The boards of the two companies will meet on 10 March to consider the merger proposal.
The merger, when it goes through, will add 1.33 million tonnes to RIL’s petrochemicals capacity and Rs5,200 crore to its sales revenue. While the increased capacity will be less than 3% of the global installed capacity for petrochemicals, the merger will help RIL raise its net worth to Rs 50,000 crore.
While no swap rate has yet been announced, Mukesh Ambani, chairman of RIL and, his associates are likely to continue to own a majority stake in RIL even after the merger. Analysts expect a swap ratio of between five and six shares of IPCL for every share of RIL. According to sources familiar with the development who did not wish to be named, the swap ratio for IPCL would be at a discount to its current market price. RIL, these sources added, offers IPCL shareholders a portfolio of diversified businesses which is somewhat more insulated from swings in prices of petrochemicals.
Earlier, in February, the board of RIL agreed to issue preferential warrants worth $3.53 billion to Ambani and his associates, a move that, when it goes through, will increase their holding in RIL to around 55%. Shareholders of the company will vote on the preferential issue later this month. The preferential issue will ensure that the stake of Ambani and his associates in RIL does not fall below 50%, even after the merger goes through.
Sources at RIL who did not wish to be identified said the company was trying to move to an integrated management and operating structure by merging the two companies. The product portfolios of RIL and IPCL are almost the same and the former is already among the top 10 producers in the world in most product categories.
Executives in the petrochemicals industry said, on condition of anonymity, that the merger would result in several operational benefits. They pointed out that both RIL and IPCL have naphtha-fed crackers at Hazira and Vadodara and gas-fed crackers at Gandhar and Nagothane. The feedstock (oil) used by IPCL can be supplied from Reliance’s refinery without payment of any value-added tax since this will be an internal arrangement between two units of the same company, they explained.
Niraj Mansingka of Edelweiss Securities, a Mumbai-based brokerage said that although the merger will not benefit the company in terms of cost, it will certainly provide better management bandwidth. “Though RIL has been managing both these companies, it is always strategic to have a single management since the companies are engaged in the same business,” he said. “With IPCL merging with Reliance, a large integrated petrochemical company will be created which possesses a mix of competitive gas and naphtha-based assets. The merger will offer benefits of scale and greater flexibility in feedstock procurement for RIL,” added another Mumbai-based petrochemical analyst who did not wish to be identified.
RIL took over the management of the country’s largest public sector petrochemical company by acquiring 26% of its equity from the government in May 2002 at Rs231 per share. It acquired an additional 20% equity from the market through an open offer to shareholders.
The merger announcement did not not surprise the market. Analysts had been expecting it since October 2006 when six polyester companies—Appollo Fibres Ltd, Central India Polyesters Ltd, India Polyfibres Ltd, Orissa Polyfibres Ltd, Recron Synthetics Ltd and Silvassa Industries Pvt Ltd , all associates of RIL—were merged with IPCL.
IPCL shares closed at Rs231.65 down 0.94% on the Bombay Stock Exchange on Wednesday. The company has a market capitalization of Rs6,965.72 crore. RIL, in contrast, has a market capitalization of Rs1,79,672.21 crore. Its stock closed at Rs1,289.35, down 0.77%.
BSE’s Sensex, the exchange’s benchmark index closed 0.92% down. The proposed merger will increase the gap in market capitalization between RIL and Oil and Natural Gas Corp. which has market capitalization of Rs1,63,756 crore.