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RIL, RPL boards approve merger, swap ratio fixed at 1:11

Priya Ganapati in Mumbai

The board of directors of Reliance Industries Limited and Reliance Petroleum Limited have approved the merger of RPL and RIL to create the country's largest ever private sector company.

The exchange ratio for shares of the two companies has been set at one share of RIL for every eleven shares of RPL.

The merger will be with retrospective effect from April 1, 2001, representing the first full year of commercial operations for RPL.

The merger of RPL and RIL will create a giant entity, Reliance Industries Limited, that will become India's first private sector company in the Fortune Global 500 list of world's largest corporations.

"The proposed merger is in line with global industry trends for achieving scale, size, integration and enhanced financial strength and flexibility to pursue future growth opportunities in an increasingly globally competitive environment," Anil Ambani, managing director of RIL, said.

The merged entity will have a family of 3.5 million shareholders and will be India's only fully integrated energy company, with operations in oil and gas exploration and production, refining and marketing, petrochemicals, power and textiles.

Based on announced results of RIL and RPL for first nine months of the fiscal 2001-02, the merged company, RIL will have sales of $ 11.8 billion, representing nearly 3 per cent of India's GDP.

It has an operating profit of $1.8 billion and net profits of $0.8 billion, which is nearly 30 percent of the total profit of all private sector companies in India.

The merger will lead to a 32 percent increase in RIL's equity and result in an increase in the annualised EPS from Rs 26 per share to Rs 28.8 per share.

The timing of the merger has, however, come as a surprise to many. RPL, on a standalone basis, is India's largest private sector company in terms of sales and second only to RIL in terms of profit, net worth and assets.

Its state-of-the-art refinery at Jamnagar in Gujarat has operated at 107 per cent capacity utilisation rate and is one of the most competitive companies in its sector.

But, the RPL is facing an increasingly competitive environment. The stress on economic reforms has meant that India is rapidly moving towards dismantling the administered price regime (APM) in the refining industry.

The government's decision to divest domestic public sector oil companies like HPCL and BPCL has also increased competition.

Reliance hopes a merger between the two biggest companies in its stable will give it the financial flexibility to move aggressively towards new acquisitions and grow quickly to meet the demands of a fast-changing market.

Pre-merger, RIL had nearly a 62 per cent shareholding in RPL. Of this 28 per cent directly held by the company will be now cancelled. The 36 per cent RPL shares held by Reliance Investments Holding Limited, a 100 per cent subsidiary of RIL and RIL associates, another holding company will now be put in a trust that will constitute 12 per cent of RIL's equity post merger.

This 12 per cent equity is valued at $1.1 billion and could be easily monetised in international markets through strategic sales or financial investors.

This ability to sweep up such huge capital through relatively easy methods has been one of the biggest rationales behind merging the two companies.

"The merger will lead to a 32 per cent increase in equity capital from $215 million to $284 million and the issue of 340 million additional shares," Ambani said.

However, the merger means that the promoter's stake will decline from 44 per cent to 34 per cent, while public participation will increase from 17 per cent to 19 per cent.

"The merger clearly reflects RIL's strong commitment to future growth and providing value to its shareholders. We now have the financial strength and structure that gives us the ability to scale and opens up significant opportunities in India, whether they be in HPCL, BPCL or other divestments," Ambani said.

But he did not elaborate on what kind of acquisitions or growth opportunities RIL is looking at.

Eighty-six per cent of RIL's capital post-merger is expected to be in demat form and the rest 14 per cent will be held by small investors.

RIL still has over a million shareholders that hold 100 shares of the companies in physical form.

Price Waterhouse Coopers and S B Billimoria, with J M Morgan Stanley acting as financial advisors for the transaction, have valued the merger.

The new merged entity RIL will now have interests in oil and gas, textiles, refineries, petrochemicals and fibres. It has a 26 per cent stake in Reliance Telecom and a 45 per cent stake in Reliance Infocom.

RIL also has a 34 percent stake in BSES, the power major that is one of the bidders for the disputed Enron-backed Dabhol power project. RIL also has a significant stake in Reliance capital that works in financial services, asset management, stock brokering and insurance sectors.

With its contribution of $ 2.1 billion to exchequer, RIL represents 10 per cent of the indirect tax revenues of the Indian government.

Even as the board formalised the merger, independent rating agency, CRISIL, reaffirmed its outstanding AAA and P1+ credit ratings for the new entity, RIL, and has placed RPL's existing AA+ rating on rating watch, with positive implications.

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