Reliance Industries Limited

Introduction to company

 Reliance Industries Limited

Reliance Industries Limited (RIL) is India's largest private sector company on all major financial parameters with a turnover of Rs. 1,39,269 crore (US$ 34.7 billion), cash profit of Rs. 25,205 crore (US$ 6.3 billion), net profit (excluding exceptional income) of Rs. 15,261 crore (US$ 3.8 billion) and net worth of Rs. 81,449 crore (US$ 20.3 billion) as of March 31, 2008.

RIL is the first private sector company from India to feature in the Fortune Global 500 list of 'World's Largest Corporations' and ranks 103rd amongst the world's Top 200 companies in terms of profits. RIL is amongst the 30 fastest climbers ranked by Fortune. RIL features in the Forbes Global list of the world's 400 best big companies and in the FT Global 500 list of the world's largest companies. RIL ranks amongst the 'Worlds 25 Most Innovative Companies' as per a list compiled by the US financial publication-Business Week in collaboration with the Boston Consulting Group.

 Reliance Petroleum Limited

Reliance Petroleum Limited (RPL) is a subsidiary of Reliance Industries Limited. RPL is setting up a greenfield petroleum refinery and polypropylene plant in a Special Economic Zone at Jamnagar in Gujarat. With an annual crude processing capacity of 580,000 barrels per stream day (BPSD), RPL will be the sixth largest refinery in the world. Merger of reliance industry and reliance petroleum limited . it's kind of vertical merger

 Merger Details:

Under the terms of the proposed merger, RPL shareholders will receive 1 (one) share of RIL for every 16 (sixteen) RPL shares held by them.

The appointed date of merger of RPL with RIL is 1st April 2008. RIL will cancel its holding in RPL. Based on the recommended merger ratio, RIL will issue 6.92 crore new equity shares to the existing shareholders of RPL. This will result in a 4.4% increase in equity base from Rs 1,574 crore to Rs 1,643 crore. Consequently, the promoter holding in RIL will reduce from 49.0% to 47.0%

 Reasons of merger

The prime motivating factors for this merger appear to be to gain "dinosaur"-like size which will strengthen RIL's balance sheet. In the short term, it may also help the company play down the expected under-performance in the current fiscal. The way to look at the merger though is that it was always waiting to happen. There seem to be two main reasons why RPL was floated.

 Similar track

In the present instance, the announcement has been made on Friday, February 27 while the board meeting to finalise the merger is scheduled for Monday, March 2. This is, of course, only a symbolic similarity. There are larger, more serious similarities between the two mergers.

First, the merger in 2002 came on the back of a difficult period for RIL in its (then) main business of petrochemicals. The company had seen a fall in sustainable earnings growth in two of the three quarters ending December 31, 2001. Petrochemical prices were soft and the economy was down, leading to demand contraction.

The last couple of quarters of this fiscal have similarly been difficult ones for RIL; earnings actually declined in the third quarter ended December 2008 -- the first such decline in 12 quarters. There are also murmurs in the market -- unsubstantiated, of course -- about potential losses facing the company in crude futures market positions, currency exposure and in the foray into retailing. We may never know how correct these murmurs are. Yet, the fact is that the company is facing a tough time on the earnings front.

Back in 2002, the merger of the original RPL was backdated to be effective from April 1, 2001 and speculation then was that this was done to mask the under-performance of RIL by combining the cash-rich RPL business with itself. Going by this logic, chances are high that the current merger will also be with retrospective effect from April 1, 2008.

Second, the merger of the original RPL in 2002 benefited RIL in terms of a large depreciation cover along with other tax benefits as RPL supplied a couple of products to RIL. In the present instance, the merged RIL will benefit tremendously from the tax benefits that the new RPL enjoys by virtue of its location in a special economic zone (SEZ).

Such benefits include income-tax exemption for 100 per cent of profits derived from exports in the first five years of operations of the RPL refinery and 50 per cent of profits for the next five years. Besides, the new refinery will not have to pay excise duty and service tax for products and services, respectively, sourced from within India. It will also be exempt from stamp duties on land transactions and loan agreements.

The third similarity is likely to be in the share exchange ratio. If past mergers are any indication, the ratio could be skewed in favor of RIL shareholders.

The merger of the original RPL where each share of RIL was exchanged for 11 of RPL favored RIL's shareholders. Speculation on the exchange ratio for the present merger ranges between 1:16 and 1:19 based on the market prices of the two shares.

 No synergies

There was at least a façade of business synergies in the merger of the original RPL with RIL. The original RPL was supplying naphtha and a couple of other refinery by-products to RIL's petrochemical complexes. Such synergy is not evident between the new RPL and RIL. Except for RPL's refinery being technologically more advanced, there is no difference between it and RIL's existing Jamnagar refinery.

Crude oil sourcing benefits are touted as an advantage from the merger but nothing prevents joint sourcing of crude in the international market by the two companies jointly. Indeed, the group was setting up trading desks in international centers to source crude for the two companies.

 EPS accretive:

Mukesh Ambani