| Mukesh: The big bang'
Mumbai, Aug. 28: Reliance Industries Ltd, the largest private sector company in India, is looking to acquire global oil firm BP’s olefin and derivatives business for which it may have to stump up anywhere between Rs 25,000 crore and Rs 30,000 crore.
If the Mukesh Ambani-run company pulls off the deal, it will be the biggest-ever acquisition by an Indian firm, dwarfing Oil and Natural Gas Corporation’s $780-million (about Rs 3,500 crore) deal to buy a stake in Sudan oil fields.
Senior RIL officials are undertaking a due diligence exercise on BP’s olefin’s business, said sources. When asked about it, they refused comment. The audacious bid could catapult RIL into the top five in the pecking order of petrochemical companies. At present, the value of RIL’s petrochemicals business is Rs 12,500 crore.
For close to a year, BP has been weighing the possibility of spinning off the business to facilitate its sale. As a second option, it has been considering a proposal to list its petrochemicals unit as a separate entity on the bourses and raise money for expansion of other businesses.
Sources, however, say Reliance is still in the preliminary stage of the bidding process. Nikhil Meswani, Mukesh’s cousin, was in London to initiate discussions. “Due diligence is on and the company would have signed confidentiality clauses in the agreement before starting the exercise,” said sources. This explains why the company is guarded on the BP bid.
BP is keen to sell the petrochemicals business, which suffered a loss of Rs 3,900 crore last year.
If Reliance is unable to swing this deal, it has another Canadian company ' Nova Chemicals ' on its radar. This company is far smaller in size than BP’s olefins unit.
BP Plc is the world's second-largest oil group by shareholder wealth. Recently, it had rebranded its olefins and derivatives plastics business, ahead of a planned selloff. The unit, called Innovene, is headquartered in Chicago. Formerly known as BP Chemicals, it recorded sales of over $15 billion last year and is the fourth largest petrochemicals firm in the world. Innovene functions primarily as a feedstock supplier for petrochemicals and plastics.
The big question is where will RIL get the money to fund such an acquisition, which even ONGC, the wealthiest company in India, would balk at.
Industry sources said Reliance has the resources. It plans to build the world’s largest grassroots petroleum refinery when it scales up the 31-million tonne Jamnagar plant to 60 million tonnes in two to three years.
Mukesh, who staved off a determined bid by brother Anil to split the petrochemicals business, wants to retain it as the core activity.
Analysts say the annual cash flows of Rs 12,500 crore from existing businesses would be enough for RIL to launch a bid for the BP unit. Some experts believe that with RIL announcing a rash of expansion projects worth Rs 45,000 crore, the whiz kids on the fourth floor of Mumbai’s Maker Chambers IV will tap other avenues to raise cash for the deal.
One possibility is encashing RIL’s treasury stock, which is held by the Petroleum Trust and a few other group subsidiaries. This treasure trove accounts for 12.2 per cent of the RIL equity ' or 17 crore shares ' and its value estimated to be over Rs 12,500 crore.
The treasury stock was kept out of the deal with brother Anil that carved up the assets of the Rs 100,000 crore Reliance empire last month. The beneficiaries of the shares are the 2.3 million RIL shareholders.
A school of thought argues that it makes sense to privately place the RIL treasury stock with strategic investors as the divestment would help garner well over Rs 12,500 crore for future expansion plans.
In any case, the company has to decide fast as the time limit to divest its stake expires five years after the merger of RPL with RIL. There is only a year to go before the deadline ends, after which the stock has to be extinguished. What better timing than to encash the treasury stock and use it to meet half the costs of Innovene!