Is Reliance Industries Ltd (RIL) engaging in some serious deleveraging or is it tactfully defocusing from its traditional oil and gas businesses? While it’s difficult to read the mind of the company run by India’s richest man, it does look like RIL is achieving both objectives through its deal with Saudi Arabian Oil Co. (Saudi Aramco).
The world’s largest oil producer will acquire a 20% stake in RIL's refining and petrochemicals business at an enterprise value of $75 billion, the latter announced at its annual general meeting (AGM) on Monday.
In end-June, RIL had a net liability of $36.9 billion, with the refining and petrochemicals business housing about $5.6 billion of it, analysts at Jefferies India Pvt. Ltd said in a note to clients last month. Based on these numbers, Saudi Aramco may shell out about $14 billion for the stake purchase, which will in turn reduce RIL’s net liability figure by about 40%.
RIL also said that it intends to become a debt-free company by 2021. While one may quibble about its exclusion of capex creditors from the definition of debt, the general trajectory of its balance sheet will please investors. Reliance’s global depository receipts (GDRs) were trading 6.5% higher in London on Monday.
The deleveraging aside, the stake sale to Aramco has other messages as well. It’s tactful on the part of the company to give up some of its ownership in what is seen as its core business. Importantly, the move will free up resources for the group’s consumer businesses, which enjoy far higher valuation multiples.
What’s more, in the process, RIL has extracted a decent valuation for the refining and petrochemicals assets. The median valuation across the Street for the refining and petrochemicals business is around $70 billion.
The Saudi state-owned oil company has been aggressively increasing its footprint in downstream businesses world over, and its eagerness to diversify beyond the upstream oil production business has resulted in handsome valuations for RIL’s asset.
To be sure, RIL has engaged in deleveraging moves even in the consumer businesses, such as the creation of the investment trusts for its telecom infrastructure. In the AGM, it also said it will induct leading global companies as partners in its telecom and retail businesses in the next few quarters. But thus far, the majority of its stake sales have been in its oil businesses.
The fact that the company is shedding weight in its balance sheet will certainly be hailed by investors. What’s more, as a result, resources will become more freely available to RIL’s faster growing business, which will be seen as an added bonus. Needless to say, this is grave news for RIL’s competitors, whose resources now look even more scarce in comparison to the conglomerate.