RNRL to consider merger with R-Power

RNRL to consider merger with R-Power

Mumbai: The trading firm at the heart of the gas dispute between Mukesh and Anil Ambani could soon cease to be an independent entity, with the boards of Reliance Natural Resources Ltd (RNRL) and Reliance Power Ltd (R-Power) informing the stock exchanges that they would meet on Sunday to discuss a merger. Both companies are controlled by Anil Ambani.

The proposed merger is a fallout of the Supreme Court judgement of 7 May that said that natural gas was a national asset and which struck down a family agreement between the Ambani brothers that would have given RNRL access to gas from the fields operated by Mukesh Ambani-led Reliance Industries Ltd (RIL) at a discount to the price mandated by the government. RNRL was to procure the gas for power plants being set up by R-Power.

Analysts said RNRL had little choice but to merge with its sister company since the government has made it clear that an entity receiving gas should have a power plant, which RNRL doesn’t.

“The original purpose of RNRL was to get gas from the KG basin at a subsidized rate. Since that has been disallowed by the court, the sanctity of RNRL’s existence was in question," said an analyst with a domestic brokerage firm who spoke on condition of anonymity. The KG basin refers to the Krishna-Godavari gas fields operated by RIL.

A spokesperson of the Reliance-Anil Dhirubhai Ambani Group (R-Adag), which owns RNRL and R-Power, declined to comment.

“Left on its own, RNRL was a redundant entity without any assets. Without the merger, RNRL’s share value would have eroded rapidly," said Prakash Diwan, head of institutional business at Networth Stock Broking Ltd.

Share prices of R-Power gained 3.33% on the Bombay Stock Exchange on Friday to close at Rs175.15 each, while RNRL’s shares lost 1.93% to close at Rs63.65 apiece. The exchange’s benchmark Sensex index declined 48.38 points, or 0.28%, ending the day at 17,460.95. The two announcements were made after market hours.

Friday’s closing share prices imply a share swap ratio of one share of R-Power for every 2.7 shares held in RNRL.

However, market analysts said that a more fair swap ratio could be arrived at if the book value per share of both the companies is taken into account.

“Since RNRL and R-Power are both companies that have projects under development, book value is the only parameter on which a swap ratio can be decided. R-Power has a book value of Rs60 per share and RNRL has a book value of Rs12 per share, which works out to a ratio of one share of R-Power for every five held in RNRL," said independent stock market analyst, S.P. Tulsian.

The analyst cited earlier said that R-Adag might not want to risk gas allocation for the ambitious 7,480MW gas-based power plant at Dadri due to legal problems. “The Supreme Court, which would finally grant approval to the GSMA, might not buy the argument that being companies in the same group, the gas would be transferred from RNRL to Reliance Power."

The so-called gas supply master agreement (GSMA) was revised and signed on 25 May and submitted to the Bombay high court by RIL on 30 June.

R-Power had raised at least Rs11,000 crore in an initial public offering in 2008 to raise funds for its proposed gas-based power plant at Dadri in Uttar Pradesh.

In 2005, RIL had signed an agreement with RNRL to supply 28 million standard cu. m a day of gas from its KG basin at a price of $2.34 (Rs109.28 today) per million British thermal unit (mmBtu) for a period of 17 years. RIL subsequently pleaded that it could not meet these conditions as it was in contravention of the government-fixed price of gas, which is $4.2 per mmBtu.

Pallavi Pengonda contributed to this story.