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RIL Raises Rs 3,465 cr More For Takeover

A troubled petrochemicals company has become a Reliance Industries' takeover target

Sending signals that it is willing to go to extremes to effect the takeover of the troubled petrochemicals company LyondellBasell, RIL raised, on Monday, another Rs 3,465 crore more, taking the total money raised to $2 billion (over Rs 9,000 crore) over the last four months.

This it has done by selling its own treasury stock - 33 million shares at Rs 1,050 each. This was lower by 5 per cent than the stock's price at Friday’s close.

The treasury stock was created when RIL merged with Reliance Petroleum some eight years ago.

While Reliance upped the deal price to $13.5 billion last week, LyondellBasell reportedly wants $15 billion.

Reliance Raises LyondellBasell Bid

According to a Wall Street Journal report on January 7, 2009 Indian petrochemicals giant, and its largest company by market capitalisation, Reliance Industries, has raised its offer to takeover bankrupt petrochem company LyondellBasell Industries.

From the initial bid of $12 billion, RIL has increased the amount to $13.5 billion. This comes in the wake of RIL having sold treasury stock worth Rs 2,675 crore ($573 million) on January 4.

This was RIL's second-biggest effort to raise funds in less than four months, expectedly to get control of LyondellBasell.

RIL offered a 5.1 per cent discount to the current market price. Almost all the shares were bought by the Life Insurance Corporation of India (LIC). The 2.50 per cent shares sold accounted for some 1.5 per cent of RIL's outstanding issued share capital.

In September, 2009, RIL had sold Rs 3,188 crore worth of treasury stock. The difference is that then it had sold at an average price of Rs 2,125 per share (pre-bonus issue), while now it sold it at a price of Rs1,090.55.

The following article first appeared in the December issue of Wealth Insight magazine, which looks at the takeover bid by Reliance Industries of the petrochemicals major LyondellBasell.

 

RIL Eyes Mammoth Buy

From paints to fertilizer, petrochemicals industry contributes raw material to many industries making it a vital part of the global economy. But today, the situation is nebulous, making petrochemicals consultants like Gary Adams of CMAI compare it to a $100 bill that had been trampled underfoot in the slowdown. Adding to the problem are new plants coming onstream in India and China, building overcapacity. 

Understandably, many petro companies are under threat. One of them is LyondellBasell (LB), the third-largest company in the business, with revenues of over $50 billion in 2008. In January, 2009, the company’s U.S. operation filed for bankruptcy. That’s when Reliance Industries (RIL) came into the picture. Analysts have said for months that RIL’s position is ideal for a global takeover. It seems to be happening now. On November 21, 2009, RIL offered to buy LB for an undisclosed amount. Sums that are being bandied about are over $10 billion, making it an India Inc company’s largest foreign takeover.

RIL had revenues of $29 billion in FY2009 from its oil refineries, petrochemical plants and polyester sales. It is Asia’s largest manufacturer of Polypropylene (PP). With a combined capacity of over 1 million tonnes Reliance holds a 70 per cent share of the Indian market and caters to 3 per cent of the world’s consumption of PP.  

In a November, 2009 report, Macquarie Research said: “RIL has commissioned its 580kbpd refinery earlier in the year and hence requires a large consumer base. Given its larger share of Euro IV/V compliant gasoline in the product slate, the US would be the natural market for the new refinery.” 

Financing for the deal does not look like a problem. RIL holds $4 billion in cash on its balance sheet, and has $8 billion in treasury stocks. Though it has a debt of $14.6 billion with a debt:equity ratio of 0.42, its cash and treasury position provides it with sufficient liquidity to fund the buy, thereby safeguarding shareholders from the vagaries of uncertainty to a large extent.

LB has debt of $25 billion ($12 bn is subject to compromise), which pegs its market value at $12-13 billion. And the company has year-to-date operating profit of $1.68 billion for FY2009 as against peak and trough EBITDA (earnings before income-tax depreciation and amortization) of $4.4 billion and $ 2 billion respectively.

As the deal has not really thrown up any tangible value-generating idea, there are some who prefer to sit on the fence with a wait-and-watch attitude. Kotak Institutional Equities has cautioned: “We see this as a pure valuation issue as there are no real synergies between RIL and LyondellBasell — if the acquisition price is reasonable, the deal may create value. In our view, it is too early to take a call”. Even Citigroup Global Markets, suspected that the deal is more of a fire-sale than a strategic acquisition for RIL. It pointed out that RIL’s primary requirements to serve a market like the US — presence in retailing and access to crude — are absent in LB. 

RIL, whose stock is trading approximately at 18-19x its estimated 2010 earnings has been underperforming Sensex. While concerns have been raised about the LB buy, RIL’s strong finances put it in a good position to chart growth hereon.

Deal Situation (as on December 26, 2009)

The latest ground situation on the takeover bid is that Reliance may have raised its non-binding proposal, where the cash component is expected to increase from $2 billion to $5-6 billion. RIL was willing to pay a total of $12 billion for the company. This happened due to a LyondellBasell lender, the Apollo Group, which had extended loans of $10 billion, has made moves to acquire the company too. They are said to have been willing to fork out $2.8 billion in cash.

Others in the fray include Access Industries, and Ares Corporate Opportunities Fund.

The case will go to the next stage sometime in February 2010, when the Bankruptcy Court meets to take stock of the situation. Reports indicate that a 4-member RIL team is still evaluating the situation and a final bid may still be forthcoming. The timeline of the submission of their report to Chairman Mukesh Ambani is not yet clear.

Between December 17 and December 24, the RIL stock has moved from just under Rs 1,035 to Rs 1,075 - a 4 per cent gain. However, since December 1, the stock has gained just 1.17 per cent.

Major hurdles for the deal: 

1) Clearance from the Bankruptcy Judge & Committee 

2) Private equity owners who have purchased debt

3) Regulatory hurdles for foreign investors

Deal Dynamics

LB is already RIL’s technology partner for PP and High Density Polyethylene (HDPE)  

LB has 50 manufacturing facilities across 19 countries while RIL’s is at 14 facilities across India

RIL powers itself with cheap gas, LB via petrochem. This will diversify RIL’s base, but it adds to cost

RIL will expand its footprint into the US and Europe

The takeover will make RIL a top player in global refining and petrochemicals segment

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