Mumbai: Reliance Natural Resources Ltd (RNRL), the gas trading arm of the Reliance-Anil Dhirubhai Ambani Group (R-Adag) will be merged with Reliance Power Ltd (R-Power), with shareholders of the former receiving one share of R-Power for every four shares of RNRL. At the current market value of the two companies, the merged entity could have a market capitalization of at least Rs50,000 crore, though this depends on how the market reacts to the news on Monday.
The boards of RNRL and R-Power met on Sunday to approve a scheme of amalgamation. According to a statement issued by R-Adag immediately after the board meeting, the 4:1 swap ratio was based on independent valuations of both companies done by audit and consulting firm, KMPG.
Analysts say the deal doesn’t benefit RNRL shareholders much, although they admit that this is purely from the mathematical point of view. They add that the company really didn’t have a future after the government announced a gas utilization policy that doesn’t favour trading companies, and the Supreme Court ruled in favour of Reliance Industries Ltd in a fight between it and RNRL over the supply of gas from the former’s fields in the Krishna-Godavari (KG) basin at a preferential rate.
Graphic: Ahmed Raza Khan/Mint
The merger will expand the equity base of R-Power by 14.6% and reduce the holding of the promoters in the company by 4.36 percentage points to 80.42%.
The dilution in promoters’ equity in R-Power implies that the promoter group led by Anil Ambani need to offload only half of what it needed to before the merger to meet the new listing guidelines issued by stock market regulator Securities and Exchange Board of India. The regulator has mandated that public shareholding in any listed company should not be below 25%.
“The dilution in equity would be compensated by the value that RNRL brings into the company,” a R-Adag official said, speaking on condition of anonymity.
News of the merger has been in the air for some time and on Friday, R-Adag told the Bombay Stock Exchange that the matter was on the agenda for a Sunday meeting of the boards of the two companies. On the same day, shares of R-Power closed at Rs175.15 each and those of RNRL at Rs63.65 apiece. At these levels, RNRL and R-Power had market capitalizations of Rs10,394 crore of Rs41,979 crore, respectively.
Analysts say that the swap ratio may lead to a downside in RNRL’s stocks when trade opens on Monday.
“The current share swap ratio does not give any benefit to RNRL shareholders. If the share price of R-Power does not move beyond Rs175, RNRL’s market capitalization could see an erosion of Rs3,200 crore,” said Rupesh Sankhe, power sector analyst at Angel Broking Ltd.
Sankhe’s views were echoed by V.K. Sharma, head of private broking and wealth management, HDFC Securities Ltd who said that he expected RNRL’s shares to fall by around Rs20 when trading opens on Monday.
“However, the merger was necessary as the government’s gas utilization policy had made it clear that a gas trading company would not be favoured while allocating gas, and the entity receiving the gas should have power generation capacities, which R-Power has,” Sharma added.
The merger will help R-Power’s net worth improve by Rs1,900 crore to at least Rs16,000 crore.
The R-Adag statement also added that R-Power is likely to benefit from RNRL’s equity interests in four coal bed methane blocks and an oil and gas block in Mizoram, though Sankhe said that the benefit would be only marginal.
The proposed amalgamation would facilitate the accelerated implementation of R-Power’s plans for setting up at least 8,000MW of gas-based power generation capacity with gas coming into the company through RNRL’s gas supply master agreement with RIL, the statement added.
The R-Adag official quoted earlier said that R-Power might not have to sign a new agreement with RIL, as the benefits of the agreement signed by RNRL is likely to flow naturally to the company.
The proposed merger is widely seen as a result of a Supreme Court ruling passed on 7 May that overruled a family agreement between the Ambani brothers giving RNRL access to gas from RIL’s KG basin at lower price than what was subsequently fixed by the government. The two companies subsequently revised the agreement and submitted it to the Bombay high court for approval on 30 June.