INDIA’S largest private sector firm, Reliance Industries, said today it would buy out its subsidiary to create a crude refining giant in the country’s biggest-ever merger.
The share-swap with Reliance Petroleum will produce the world’s sixth-biggest refiner and signal “a significant step in our goal to be among the world’s largest global corporations,” said Reliance Industries Ltd (RIL) chairman Mukesh Ambani.
The merger will unlock “significant operational and financial synergies” between RIL and Reliance Petroleum and marks the country’s biggest ever such amalgamation, RIL said in a statement.
The move is expected to cut costs for both companies at a time of sharply lower global crude oil prices and declining earnings, as demand for fuel slips, analysts say.
Mumbai-based RIL’s main businesses are exploration and refining.
The buy-out will result in a refining behemoth capable of processing 1.24 million barrels of crude a day at a complex in Jamnagar, Gujarat – the greatest capacity of any single location in the world.
“This merger is about size and growth. The aim is to create an integrated energy global major,” said Alok Agarwal, RIL’s chief financial officer.
Under the deal, one Reliance Industry share will be given for every 16 Reliance Petroleum shares held.
RIL owns a 70.38 per cent stake in Reliance Petroleum (RPL) and is India’s biggest private sector corporation, with a turnover of $34.7bn (£24.4bn) last financial year.
Reliance’s share will rise to 75.3 per cent once it buys out oil giant Chevron Corp’s five percent holding, which it has had since 2006.
“Reliance will buy back Chevron’s stake in RPL,” Agarwal said, adding “the company’s commercial relations with Chevron would continue, but investment relations will end.” He did not elaborate on Chevron’s decision to exit RPL.
“The merger is likely to create operational synergies and indirect tax savings. Cost optimisation and better negotiating ability for buying crude is likely,” said Niraj Mansingka, oil analyst at brokerage Edelweiss Securities.
Other benefits could include the creation of a bigger balance sheet “to help raise more capital,” Mansingka added.
RIL’s refinery at the Jamnagar complex has a 660,000-barrel-a-day capacity, while Reliance Petroleum’s plant at the site can process 580,000 barrels daily. The merger will give RIL full control of Jamnagar.
However, it could be six months before the companies converge as Reliance must seek regulatory approval from the stock exchanges and courts, officials said.
But Petroleum Minister Murli Deora said in New Delhi late last week the legal path to the merger was clear and “there should be no legal issues.”
