RIL-RPL merger to put India on global energy map

BOMBAY, 11 March — There has always been this debate going on the board rooms world over whether it is best to grow by increasing sales or by taking the fast route of mergers and acquisitions (M&As). And going by the way in which M&As take place in the corporate sector today, it becomes quite clear that M&A is indeed the fastest route to superlative growth.

And this was more than proved right by the mega merger in the Indian corporate world. The merger of Reliance Industries and Reliance Petroleum left everyone gaping at the sheer size of the new entity that was to be created.

Reliance Petroleum (RPL), the country’s biggest private sector refiner, is being merged with Reliance Industries (RIL), the number one polyester company in India. The merged entity has created India’s first fully integrated oil and petrochemicals major and a company of global size.

The combined might of the two companies will make it the single largest company in India with a combined turnover of over $11.22 billion. The turnover of the two companies in nine months ended December 2001 was $8.96 billion, while the combined profit was $690 million. Post merger there will be a 32 percent increase in equity capital from Rs.10.53 billion ($215 million) to Rs.13.96 billion ($284 million), reflecting issue of 340 million additional shares.

The merged entity, stated to be the fourth largest oil and petrochemicals giant in Asia, is all set to now follow the footsteps of global giants such as Royal Dutch/Shell group and Exxon-Mobil Corporation.

It has catapulted Reliance to No. 425 on the Fortune 500 list, ahead of giants such as Marks & Spencer, Christian Dior and Northwest Airlines, with its combined cashflow of $1.75 billion. There is a substantial synergy between the two companies. Around 40 percent of RPL’s production is consumed by Reliance Industries.

The merger of RPL with RIL represents the largest ever merger in India, creating the country’s largest private sector company on all financial parameters, including sales, assets, net worth, cash profits and net profits. The merger creates India’s only world scale, fully integrated energy company, with operations in oil and gas exploration and production, refining and marketing , petrochemicals, power and textiles. The merged entity, RIL, will enjoy global ranking in all its major businesses, and leading domestic market shares.

Financial strength and flexibility are important competitive advantages of this merger, enabling investment in larger payoff  acquisition and growth opportunities. It is in line with global industry trends to achieve size, scale, integration and greater financial strength, for maximizing shareholder value.

The merger ratio is that of 1 share of RIL for every 11 shares of RPL. RIL will have nearly 3.5 million shareholders post merger — reflecting perhaps the world’s largest shareholder family. RIL’s floating stock prior to the merger was about 56 percent, which will come down to 54 percent post merger. The promoter group’s stake will decline from 44 percent pre-merger to 34 percent post merger.

Analysts said the merger will make it easier for the group to bid for buying the Indian government’s stake in public sector oil majors Hindustan Petroleum Corporation and Bharat Petroleum Corporation, which between them control about 40 percent of the country’s 2 million barrels per day oil market.

The managing director of Reliance group, Anil Ambani explained the rationale for the merger by comparing it with recent mega-mergers in the petroleum industry such as the $80 billion Exxon-Mobil merger that created the world’s largest oil company or the $48 billion BP-Amoco merger, which set off another round of consolidation in the global oil and gas industry.

So what happens to the company’s operations after the merger? Answering the queries at the press conference in Bombay, Anil Ambani assured that post merger, RIL’s refining margins are expected to increase in future. And henceforth, for the future RIL will focus on energy while group companies, Reliance Capital and Reliance Infocom will take care of the financial service and telecom business.

RPL’s credit rating would shoot up from AA to AAA+, which would allow the company to refinance its debt and save some money.

The reduction of interest costs could be between 50 to 100 basis points. But there might be little else by way of savings since there was already considerable synergy between the two companies.

The group, which began life as a tiny trading outfit in the narrow by-lanes of Bombay’s textile market four decades back has indeed come a very long way. And Dhirubhai Ambani, the man behind Reliance is a source of inspiration to millions vying to make it big.

There is no doubt, this merger has created a company which would take the country on the global map of energy.