In a move that was not unexpected, Reliance Industries Ltd, or RIL, India’s most valuable company, is considering merging its biggest subsidiary, Reliance Petroleum Ltd but the real surprise is the ‘Timing’. All the biggest analysts feel this action will come only after the chevrons exit means after the July 2009 but they are little bit early doing this means it is clear that ‘chevron is exiting from this project’.
Why the merger?
RIL has traditionally set up large capital-intensive projects under new companies to ring-fence itself from project risk. This happened with the first Jamnagar refinery, also called Reliance Petroleum. Now that RPL is up and running, it doesn’t make sense to keep it separate. The following the main advantages of RIL;
1. "The first advantage is that as a shareholder, RIL would have had to wait for a year to get its hands on the cash, which would have come as dividend. With the merger, the cash will be available as soon as it flows in to RPL,"
2. "Once the company is merged, the depreciation of RPL becomes the depreciation of the combined entity. Depreciation amount is kept separately in another account and is not passed on to the bottom line, reducing the profit and the tax,"
Why now?
RIL has not issued any statement. There is speculation that RPL is sitting on inventory losses and may need balance sheet support from RIL. RPL enjoys a 7-year tax break while the export-oriented status of the first unit of the Jamnagar refinery, which is part of RIL, will expire soon.
Chevron link
Chevron bought a 5% stake in RPL in 2006. It had the option to increase it to 29% before July 2009, and the speculation was that the merger would follow. The non-exercise of this option hastened RIL’s decision to fold its 70% subsidiary into itself.
Treasury stock
It could be cancelled to prevent equity dilution. RIL may also create an SPV to park the treasury shares and sell them or borrow against the stock later.
SEZ & EOU status
RPL and RIL will not lose SEZ and EOU status. They will remain as they are.
What are bankers saying?
Banks say their single-borrower limit may be breached following the merger. Bank officials say they may have to ask RBI for a special dispensation.
What's in for investors?
The market feels RPL shareholders will lose out. But the final position will depend on the swap ratio. The ratio could be between 17:1 (17 RPL shares for one RIL share) based on Friday’s closing prices and 24:1 derived from the book value. Analysts say it could be around 20:1. It also depends on whether the treasury stock is cancelled.
There is announcement that RIL will safe guard the ‘Minority share holders of RPL and will benefited after the merger’ It’s the only relief word for RPL investors. In my view, the swap ratio is favored to the parent company.
What to do?
On Monday, if both are opened the on flat note then better to exit from RPL and buy RIL for the same value. If both are opened gap down or RPL down and RIL up; then hold RPL wait for the swap ration then decide.
In whatever the case means either up or down it is better to “short on RPL in futures is the safest hedging opportunity.”
All the best
With thanks
Be and make
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