Even as investors gave a big thumbs up for Reliance Industries' plan to take over troubled petrochem and refining major Lyondellbasell Industries, the analyst community seems to be holding out for valuation details before giving out their verdict. Hazarded valuations for the Netherlands-based company, which currently has a negative networth of around $10 billion, ranged from $12 billion by CLSA Asia-Pac to as high as $30 billion by Daiwa Research. RIL, which has around $4 billion in cash and $8 billion in treasury stock, will have to commit at least half the value of the company in cash to gain a controlling interest.
Most were unanimous in their verdict that the deal makes sense only if it comes at a distress discount since the company is under bankruptcy protection. While RIL's decision to expand inorganically into more developed markets such as the US – where it sells a large part of its output – did not come as a surprise, many were expecting RIL to snap up an operator with a strong retail chain.
“We see this as a pure valuation issue as there are no real synergies between RIL and Lyondellbasell—if the acquisition price is reasonable, the deal may create value. In our view, it is too early to take a call,” cautioned Kotak Instituional Equities in its update on the move. The broker continued to maintain a sell rating on RIL.
Daiwa said the current talk of $10 billion in cash and a possible reduction of the debt burden from $30 billion to around $21 billion will make the company too “expensive”. It pointed out that at $31 billion, including cash and debt, the company would be valued at nearly 14 times its gross profits [EBITDAR] of $2.2 billion. “We find it difficult to comment on the financial attractiveness of the acquisition until the deal value is disclosed,” it pointed out.
Even Citigroup Global Markets, one of the most positive on the deal suspected that the deal is more of a firesale than a strategic acquisition for RIL. It pointed out that RIL's primary requirements to serve a market like the US – presence in retailing and access to crude – are absent in Lyondellbasell.
“While petrochemical assets provide size and may be some cost-cutting benefits in the long-term, the US refinery may not provide significant inroads into US apart from operational synergies (crude sourcing, etc.),” it said in its take on the deal. Citi, however, held that the assets are good value for money if the total company was valued at $12 billion or less. “Given Lyondellbasell's Chapter 11 status, we would be positive on RIL’s ability to drive valuations in this case,” it hoped.
Kotak too was disappointed at what it called the absence of “any real synergies” between the operations of RIL in India and LyondellBasell in Europe and US. “RIL does not have access to feedstock (crude oil) that it can use in LB’s refining assets, it cannot integrate operations due for logistical reasons (distance between India and LB plants) and Lyondellbasell is an efficient company in terms of operations; thus, scope for cost reduction may be limited,” it pointed out.
However, CLSA called the deal a “compelling opportunity,” if the company is valued at no more than $12 billion “Lyondellbasell is a compelling one-off opportunity for Reliance, in our view, but upsides will depend on its ability to improve operations, how quickly the refining and petrochemical cycles turn around and the total enterprise value ascribed by Reliance for LB,” it said, pointing out that the company's profitability has more than halved from its peak in 2008 and expected to decline further in 2010 to hit an EBITDAR of $1.6 billion.
Meanwhile, RIL stock ended at Rs 2,195 on the Bombay Stock Exchange after hitting an intra-day high of Rs 2,205, 3.3% higher than Friday's closing price.
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