Ending months of speculation, Reliance Industries today said it is considering merging group firm Indian Petrochemicals Corporation Ltd with itself.
The boards of both the companies will meet on March 10 to consider the plan, the companies said in a statement to the Bombay Stock Exchange after the markets closed for the day on Wednesday.
Reliance chairman Mukesh Ambani and his associates will hold nearly 53 per cent stake in the merged entity after the conversion of preferential warrants. The promoters are in the process of subscribing to preferential warrants to scale up their stake by 4 per cent from 50.4 per cent.
"This merger was long overdue," said Kenin Jain, an analyst with ASK Raymond James. "It will complete the entire value chain of petrochemical products for Reliance. This augurs well for both the companies," he added.
Analysts said Reliance was supplying raw materials to IPCL, which then made final products for end-user industries like rubber.
"Post-merger, Reliance would offer end-to-end product solutions, which would give it a pan-Indian and perhaps Asian dominance," said an analyst. The merger could also result in substantial tax savings for the merged entity as Reliance buys certain products from IPCL and vice-ersa.
Analysts also said the merger may help Reliance increase its revenue from chemicals by as much as 4 per cent to 48 per cent of the total. IPCL uses naphtha made at the parent's refinery as feedstock to make chemicals.
On Wednesday, Reliance's stock closed 0.77 per cent down at Rs 1289.35, while IPCL closed 0.94 per cent down at Rs 231.60.
Based on the price to earnings method, analysts said one share of Reliance could fetch four shares of IPCL. On the other hand, by using the book value formula, the swap ratio would come to 1:2. But the market was abuzz over a swap ratio of 1:6.
The merger, if approved, would add more than Rs 11,000 crore (Rs 110 billion) to Reliance's balance-sheet and Rs 1,163 crore (Rs 11.63 billion) to its profit, based on IPCL's fiscal 2006 financials.
Reliance had paid Rs 1,491 crore (Rs 14.91 billion) to the NDA government in 2002 to take over 26 per cent of IPCL's equity. It came out with an open offer and increased its stake to 46 per cent. The government now holds 0.35 per cent in the company.
Last August, the Gujarat High Court had sanctioned the merger of six polyester manufacturing companies -- Apollo Fibres, Central India Polyesters, India Polyfibres, Orissa Polyfibres, Recron Synthetics and Silvassa Industries -- with IPCL, prompting speculation that a merger with Reliance Industries was on the cards.
Since Reliance took over India's second largest petrochemical company, IPCL's profitability as well as revenues have shot up substantially. During the nine-month period ended December 31, 2006, IPCL's net turnover increased by 14 per cent and profit after tax, 20 per cent.
Over the last few years, Reliance has been integrating its petrochemical business with IPCL, Nocil and SM Dyechem. In the process, it managed to take on competition from West Asian countries which enjoyed highly subsidised feedstocks and financial concessions. By 2008, Reliance has targeted to become the world's fourth largest producer of polypropylene.
Petrochemicals production accounts for 31 per cent of Reliance's revenue for the fiscal year ended March 31 2006.
Analysts bullish on RIL-IPCL merger move
Analysts said the Reliance Industries-IPCL merger makes sense if the former plans to demerge its oil exploration business. There has been speculations about RIL planning to demerge its E&P business into two different entities - one holding the overseas assets and the other holding the domestic assets.
Said Lalit Thakkar, head of research at Angel Broking, "If the demerger of the E&P business goes through and Chevron is indeed interested in that business, it makes sense for Reliance to merge the IPCL business with their petrochemical and refining business as it would expand the size of their balancesheet."
Said another analyst, who did not want to be quoted, "If a tie-up with Chevron is indeed happening, then Chevron would not want to come into a diversified company with diversified interests like retail, SEZ, etc, It makes sense for RIL to integrate its petrochemical businesses under one company. In that sense this is merger was long overdue."
IPCL owns three plants that produce chemicals to make plastics. The largest one, at Nagothane in Maharashtra, has a capacity of 400,000 tonnes a year.
The plants in Vadodara, with a capacity of 175,000 tonnes a year, and Gandhar, with 300,000 tonnes, are located in Gujarat.
