Reliance Industries merges with subsidiary

Reliance Industries (RIL) announced yesterday that it will fold Reliance Petroleum (RPL) into itself at a ratio of one RIL share for every 16 shares of RPL. Consequently, RIL will issue 69.2 million new shares and its equity capital will increase to Rs16.4 billion ($314.5 million).

RIL will also buy Chevron Corporation's 5% stake in Reliance Petroleum, as part of the plan to acquire the remaining shares of the petrochemicals unit. The ownership stake of the controlling shareholders, the Ambani family, in RIL will fall from 49% currently to 47% post-merger, due to the issuance of new shares.

RIL is India's largest private sector company with a turnover of $34.7 billion in the most recent financial year ended March 31, 2008, on which it earned a net profit of $3.8 billion.

RIL said the merger will be earnings accretive. It added that the deal is about size and diversification and will enable it to execute larger projects. It will also help RIL in sourcing crude oil for its integrated refinery complex. RPL's refinery was commissioned in December 2008 and is expected to be fully onstream in April this year.

RIL's 1.24 million barrels per day crude processing capacity at Jamnagar in Gujarat is the largest refining capacity at any single location in the world. Post-merger, RIL will be the world's 5th largest producer of polypropylene.

The Reliance group is well-known in India for launching projects in new companies and then merging them back into the flagship, RIL. The mergers are generally announced after the projects are up and running, and some analysts suggest the strategy ensures that project implementation and completion risk are kept off the RIL balance sheet.

In line with another well-established Reliance tradition, a number of advisers have been given credit for their role in this deal, which is likely to have been the brainchild of Mukesh Ambani himself. Ernst & Young and Morgan Stanley are valuation advisers to the merger, while JM Financial Consultants and Kotak Mahindra Capital are transaction advisers. DSP Merrill Lynch provided a fairness opinion for RIL and Citi provided one for RPL. Legal advice was provided by Amarchand & Mangaldas & Suresh A. Shroff & Company, while tax advice was provided by PricewaterhouseCoopers.

A banker not involved in the deal says he doubts any of the advisers would be earning anything significant on the deal, which is really akin to an asset injection. The advisers will, however, benefit from league table credit for India's largest merger.

Shares of both companies lost ground yesterday, in tandem with the broader market. RPL fell 8% intra-day before recovering to close 2% down at Rs75. RIL lost around 4% to close at Rs1,217.