1:11 swap for Reliance merger
Muscle to go on the prowl
Tax shift sparks dividend scramble
Mother of all investor clans

Mumbai, March 3: 
A swap ratio of 1:11 has been fixed for the merger of Reliance Petroleum (RPL) with Reliance Industries (RIL) in a union that will spawn the country�s first Fortune 500 private sector company. The amalgamation will be effective from April 1, 2001.

Eleven shares of Reliance Petroleum will fetch one of Reliance Industries� in a consolidation that will give the combined entity a size of Rs 58,000 crore. As a world class, fully integrated energy giant straddling oil and gas exploration & production (E&P), refining & marketing, petrochemicals, power and textiles, the company will join the ranks of majors like BP Amoco, Exxon Mobil and Shell in terms of forging an integrated strategy for upstream and downstream businesses.

That size is not enough was evident when Anil Ambani, managing director of Reliance Industries, told reporters here today that the merged entity still has a long way to go. �In the international context, we are extremely small. This signals that a significant opportunity exists for future growth,� he said pointing out to that fact that while sales of the merged entity would be $ 11.8 billion, it stands at $ 213 billion for Exxon Mobil and over $ 29 billion in the case of Dupont.

The exchange ratio was approved in separate board meetings of RIL and RPL today. The RIL board also recommended an interim dividend of 47.5 per cent (Rs 4.75 per share, which will cost the company Rs 551 crore.

RPL has recommended an interim dividend of 5 per cent (Rs 0.50 per share). This will result in a dividend outgo of Rs 287 crore. The combined outgo will be close to Rs 900 crore.

After the merger, the Ambanis� stake in RIL will come down to 34 per cent from 44 per cent. A trust will be set up that will hold 7.5 per cent in favour of Reliance Industrial Investments and Holdings. Of the rest, 5 per cent will be vested with RIL associates, 14 per cent with FIs/banks/mutual funds, 21 per cent with FIIs/GDRs/NRIs and 19 per cent with public.

Explaining the reasons for the merger, Ambani said size, scale and integration are the key determinants for success in the global energy industry. �Further, financial strength and flexibility are also significant for attaining competitive advantage. The mega-merger will lead to increased scale and integration and it is line with global industry trends. This, apart from financial strength, will lead to maximisation of shareholder value,� he added.

April 1, the day the merger comes into effect, also represents RPL�s first full year of commercial operations.

Another factor that prompted the merger was the fast pace of reforms in the country, especially the deregulation in the hydrocarbon sector, dismantling of the administered price mechanism, the government�s decision to grant marketing rights for transportation fuels to private sector and the selloff planned in HPCL and BPCL.

The merger will lead to substantial benefits for Reliance Industries. These include scale, integration, global competitiveness, operational synergies, cost efficiencies, rationalisation of business processes, optimisation of tax sops and lesser volatility in earnings. It will add over Rs 1,300 crore to net profit.

RIL�s product mix will change too: refining and marketing will now account for an overwhelming 58 per cent of its turnover, petrochemicals 40 per cent, exploration & production 1 per cent and textiles less than 1 per cent.

Stake divestment

The Reliance group is planning to divest over 12 per cent of the post merger-equity capital of RIL to strategic and/or financial investors. The money will be used to purse acquisition opportunities in the energy sector. The group holds 65.25 per cent in RPL. Of this, RIL controls 28 per cent and the balance is with Reliance Industrial Investments and Holdings, a 100 per cent subsidiary of RIL; associate firms hold the rest. RIL�s own stake of 28 per cent will be cancelled.


Mumbai, March 3: 
An aggressive conglomerate, Reliance Industries (RIL) mellowed in the days after it lost out in the race for Videsh Sanchar Nigam and IBP. That, many say, could change once the merger comes through.

A Rs 58,000-crore behemoth, the largest in India�s private sector, it will be strong enough to mount acquisitions. The merger will create an enterprise with size and financial strength to pursue domestic and international growth opportunities of scale in the oil sector.

�The size will enable significant opportunities for growth in the future,� said Anil Ambani, managing director of RIL.

While a section of the market believes the merger is aimed at achieving some sales tax savings, protecting itself from the certain changes proposed in the recent budget, including the minimum alternate tax, and improving its balance-sheet size and improve its cash flow.

A series of developments in February, Ambani said, may have influenced the two group companies to unite. The Cabinet decision of February 27, clearing the way for the dismantling of the administered pricing mechanism (APM) could have hastened the union. The budget reaffirmation that disinvestment in HPCL and BPCL is on course also appears to have forced the pace. �Economic reforms have moved ahead. The potential divestment of HPCL and BPCL are both options RIL will look at,� Ambani told reporters here today.

�What is the size of Reliance Industries, pre-merger?� Nimesh Kampani said on being asked about the logic of the merger. It is half the size of HPCL and BPCL.

The merged entity will be better placed to bid for the oil PSUs. Kampani�s firm, J M Morgan Stanley, have been the advisors to the merger of the Reliance twins.

The union enhances RIL�s financial flexibility, by providing an opportunity to raise additional resources of nearly Rs 11,000 crore based on a 1:1 debt-equity ratio, without recourse to its balance-sheet or any equity dilution.

Reliance is not only betting on acquiring refineries, but is also looking at the upstream segment. �Getting crude is one area of specific interest to us,� said Ambani. RPL�s 27-million tonne refinery requires 6 lakh barrels of crude daily.

Reliance is still awaiting the guidelines on retailing of oil. Analysts expect the government to introduce certain clauses that will prevent private sector companies from poaching on petrol pump owners. Thus, it may have to look at setting up new filling stations in the near future, instead of depending on acquisitions alone.

Measured against global giants like Royal Dutch Shell and Exxon-Mobil, Reliance is still puny. �We are extremely small,� Ambani said during his presentation.

Opportunities in Asia-Pacific may even attract RIL in the future. There are significant opportunities in India itself�, Ambani added referring to HPCL and BPCL, the two state run companies which will be up for grabs in the near future.

Asked whether RIL was happy with the way the disinvestment of IBP was processed, Ambani said the disinvestment process was the �most transparent� and the �most defensible�.


Mumbai, March 3: 
The queue of companies that announce board meetings to declare interim dividends is getting longer as the budget-announced April 1 deadline to tax pay-outs in the hands of investors looms.

The Bombay Stock Exchange (BSE) has been inundated with notices to this effect after finance minister Yashwant Sinha abolished the 10 per cent distribution tax last Thursday.

Seventeen firms had sent in letters on Friday, and there was a beeline by Saturday. Cipla, GE Shipping, Varun Shipping, Marico, Otis Elevators, IPCA and FDC were among those that told exchanges about their dividend plans on Friday.

Kotak Mahindra Finance and TVS Motors were the first off the block to hold a dividend meeting, but the ranks swelled quickly to include blue-chips like Reliance, Nestle and Tata group companies like Trent, Indian Hotels, Tata Iron & Steel, Tata Chemicals, Tata Tea and Tata Power.

Kotak Mahindra declared a dividend of Rs 3 per share, which amounts to 30 per cent, while TVS Motors handed a more generous Rs 9 per share (90 per cent).

The move to declare a dividend before the end of the current financial year is aimed at dodging the finance minister�s tax rationalisation measure that abolishes dividend tax under Section 115-0 of the Income Tax Act and scraps Section 10 (33) (I) of the same statute.

The changes will ensure that the incidence of tax shifts from firms to investors. For the promoters, the actual tax incidence may be higher once Parliament votes the new tax proposal into law.

Meanwhile, Hero Honda Motors is likely to pay its second special interim dividend of about 250 per cent for this fiscal to its shareholders. Finance director Ravi Sud said the dividend payout of 200-250 per cent totalling Rs 88-110 crore would be taken up on the March 8.


Mumbai, March 3: 
When markets open on Monday, all eyes will be rivetted to the Reliance and RPL counters. The announcement of board meetings for considering the merger was made after trading hours on Friday.

Brokers say the merger ratio announced today is in line with expectations. Eleven shares of RPL will be exchanged for one share of RIL. On Friday, Reliance closed on the BSE at Rs 322.15, while RPL ended the day at Rs 28.60.

Rakesh Jhunjhunwala, a prominent investor and broker, said the merger comes as a big boost to the Reliance stock. He would not hazard a guess on the price, but expects the share to close in the positive territory.

�Even if you calculate the current market price of RPL, the ratio is fair. 11 shares of RPL on the basis of Friday�s closing figures amounts to Rs 314. RPL shares have been valued at a modest premium,� he said.

In terms of value, the Reliance share will be second only to Hind Lever. RPL and RIL shares will both be worth Rs 49,000 crore, less than HLL�s Rs 57,782 crore. Infosys and Wipro follow them, with Rs 38,013 and Rs 23,879 crore as RIL after the merger has nudged it aside.

The merger will increase the company�s equity capital by 32 per cent, from Rs 1,053 crore to Rs 1,396 crore. RIL will have nearly 35 lakh shareholders, the worlds largest shareholder family. The floating stock is also expected to come down by two percentage points, from 56 to 54 per cent. Ambani said 17 per cent will be held by the public.

Further, almost 86 per cent of RIL�s capital, post merger, will be held in demat form. The balance will be held in physical form by small shareholders. Foreign investors will hold 21 per cent of the firm�s equity.

On being asked whether RIL will revise the pricing of its buy-back plan, Ambani said: �We�ll wait and watch, on how the market performs and in that context how RIL performs. We will keep an open mind.� RIL, one may recall has a buyback resolution in place that allows the company to buy its shares up to a limit of Rs 303. However, the company has so far not used this facility.


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