Reliance becomes a trillion rupee company

India's biggest private sector company just got bigger by merging with IPCL.
On March 11, Reliance Industries determined the swap ratio for its merger with Indian Petrochemicals Corporation (IPCL), thereby creating a company with combined sales of a trillion rupee ($23 billion). IPCL shareholders will get one Reliance share for every five IPCL shares they hold.

Reliance chairman Mukesh Ambani says: "The merger is earnings accretive for Reliance shareholders, while providing IPCL shareholders with an opportunity to participate in Reliance's diversified business portfolio."

For the last complete fiscal year ended March 31, 2006, Reliance turnover was Rs891 billion on which it earned a net profit of Rs132 billion. IPCL turnover was Rs123 billion on which it earned a net profit of Rs12 billion. The combined sales of the two entities will be Rs1014 billion, just a shade over Rs1 trillion.

Post merger, Reliance's share capital will increase 4% to Rs14.54 billion ($329 million) from Rs13.94 billion currently. As per the latest Reliance stock exchange filing in January 2007, the founding shareholders own 50.62% of the company. Post-merger analysts estimate the size of the Ambani family stake could reduce marginally.

Ambani seems to have anticipated this. On February 27, he initiated a process of issuing owners' warrants at an issue price of Rs1402 per share, based on SEBI guidelines, upping his shareholding by about 4.5% on a fully diluted basis. The move also illustrated AmbaniÆs confidence in his companyÆs future as the share touched a one-year high of Rs1,445 on February 26. Ambani said then that the issue of warrants ôdemonstrates our commitment to value creation at Relianceö.

Reliance is IndiaÆs largest petrochemical company and is also in the business of polyester and fibre yarn, oil and gas, refining and is foraying into retail and real estate. IPCL is IndiaÆs second-largest petrochemicals company operating three main plants.

Ambani says after the two companies are combined the smaller IPCL will be better insulated from earnings volatility and cyclical risks of the global petrochemicals industry. Reliance also says the move is in line with industry trends and will enhance Reliance's financial strength to pursue organic and inorganic growth opportunities in India and abroad.

Reliance, through its associate companies, owns more than 46% of IPCL. It acquired 26% in 2002 during a government of India disinvestment programme then upped its stake by around another 20% through a mandatory open offer. Reliance has significantly grown IPCL since the acquisition, with revenues now more than double 2002 levels and net profit up more than 10 times. Ambani indicated the Reliance shares received by its associate companies post-merger would be "monetised at an appropriate time in the future and could be offered to financial or strategic investors in domestic or international markets".

Boutique investment bank Edelweiss Capital was positive on the merger saying "it brings benefits like reduced management costs and increased management bandwidth". Analysts also say that Reliance will benefit from the ability to raise more debt on IPCLÆs almost unlevered cash flows. IPCLÆs current return on capital employed is higher than that of Reliance, primarily because Reliance is investing in capital-intensive areas such as retail which will yield returns in the longer term.

The swap ratio, which was largely in line with analyst forecasts last week, will be effective retrospectively from April 1, 2006. It was determined by accounting firms PricewaterhouseCoopers and Ernst & Young.

Reliance share price closed on Friday at Rs1318. IPCL closed at Rs268.

Meanwhile, JM Morgan Stanley and DSP Merrill Lynch began the year with a bang, adding significantly to their M&A league tables ranking as financial advisors to the merger.
¬ Haymarket Media Limited. All rights reserved.
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