There seems to near-consensus that Reliance Industries Ltd (RIL) has offered between $10 billion (Rs46,500 crore) and $12 billion for a controlling stake in LyondellBasell Industries AF S.C.A. But since the target company is still to emerge from Chapter 11 protection, it’s too premature to talk of valuations.

Graphics: Sandeep Bhatnagar / Mint

LyondellBasell had a total debt of $27.5 billion at the end of June 2009. If the equity has been valued at, say, $10 billion, then that would translate into an enterprise value of $37.5 billion, which is frightfully expensive for a company that had an annualized Ebitda of $2.24 billion in the first nine months of this calendar year.

Ebitda, in LyondellBasel’s case, represents earnings before interest, tax, depreciation, amortization and restructuring charges. According to a recent HSBC report, the average enterprise value/Ebitda multiple for the region in which LyondellBasel operates is 8.7.

The valuation of between $10 billion and $12 billion couldn’t possibly be the enterprise value either. Within the total debt of $27.5 billion, liabilities that aren’t subject to compromise themselves amount to $15.5 billion. Liabilities that aren’t subject to compromise represent liabilities that are secured by collateral, and have priority over liabilities that are subject to compromise. It’s far from clear how much of the debt would remain on the books after the reorganization of the company that is under way is complete. And that’s simply why it’s premature to talk of the deal’s valuation.

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If RIL is able to acquire LyondellBasell at a reasonable valuation, it would lead to a sharp jump in its global rankings in the petrochemicals space. The target company’s revenues are about five times those of RIL’s petrochemicals business, and will make RIL a dominant player in the global petrochemicals market, the HSBC report notes. The main concern, of course, is that all of LyondellBasell’s operations are in developed countries and Indian firms have had an unimpressive record of effecting a turn around in such situations.

Funding the deal shouldn’t be much of an issue, what with RIL’s cash balance of $4.2 billion and the value of its treasury stock at around $8 billion. Besides, going by a recent report by Goldman Sachs, Reliance is expected to generate $27 billion in free cash flow in the next four fiscal years, after accounting for its committed capital expenditure for the oil and gas business.

LyondellBasell or any other such large acquisition would be a good way to put all these funds to use—of course, provided that the valuations are right.

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