With Chevron exiting, bigger’s better, says RIL
It was Chevron that did it, said Reliance Industries (RIL) officials about India’s largest company’s merger with its 70% subsidiary Reliance Petroleum (RPL). Speaking to the media, company officials said RIL had bought out the 5% stake that Chevron had in RPL and there was no longer any reason to keep it separate from the main company.
According to RPL’s initial public offering, Chevron was one of the two promoters of RPL. The US firm had also entered into a non-binding memorandum of understanding to supply around 35% of RPL’s crude requirements and buy up to 45% of its final produce at a price to be negotiated later. Parallel to such agreements, it also had an option to buy another 24% of RPL from RIL at a 5% discount to the market price.
RIL on Monday said Chevron was not interested in pursuing the agreement and, as such, it (RIL) had exercised the right to buy back the 5% stake Chevron already had. “A few days ago, we made the decision and communicated (to Chevron) that, under the original agreement, we had the right to buy back the shares that Chevron has at Rs 60 a share, and that the right has been exercised by us. That has been acknowledged by Chevron,” RIL’s chief finance officer Alok Agarwal said.
The Wall Street Journal quoted Chevron as pointing to “attractive investment alternatives and continuing low global demand for refined products” as the principle reasons for its decision to pull out.
An RIL official, speaking on condition of anonymity, acknowledged that Chevron seems to have changed its “outlook” towards investing in the refining sector due to the drop in oil prices and refining margins.
Despite this, Agarwal said the company has already put in place the supply and off-take agreements for the new refinery. “Over a period of time, we have been able to put in place arrangements to buy crude, for both the refineries [and] arrangements to supply products,” he said, adding that the cancellation of the investment will not impact RIL’s normal trading relationships with Chevron.
With Chevron’s exit, RIL will issue 6.92 crore new shares to the minority shareholders of RPL, who hold 24.4% of the company, at the rate of one RIL share for every 16 RPL shares held.
The 75.6% promoter holding, including the 70.6% that RIL held and 5% bought back from Chevron will stand extinguished. The exercise will see the number of outstanding shares of RIL go up by 4.23%.
Agarwal said the average profit per share is likely to increase for the merged entity. “It [the transaction] will add much more than 4.4% to RIL’s earnings,” he pointed out. RPL too will benefit from the size of the combined entity. “This merger is about size.. There are only 15 to 20 large energy players in the world and we are going to be one of them. This gives us the ability to take on projects which are much larger in size than we have done before,” he said.
He accepted that there was a chance that there would be a lack of demand in the refining sector, but said RIL’s refining business, with a total capacity of around 1.24 million barrels per day, will weather the storm better as it was more efficient than most others. “It [refining demand] may go down by 1 million barrels [per day], as some people are forecasting... [However,] complex refining margins are at least $3 to $4 higher [per barrel] than simple refining... there is a strong case for us to earn the kind of refining margins that are well above the historical averages,” he said.
According to the transaction, advised by Kotak Mahindra Capital and JM Financial, each RPL share is now worth 6.25% of an RIL share. RPL closed at Rs 75.15, 6.13% of RIL’s closing price of Rs 1225.15. The issue of new shares will take place only after several months, during which period the two companies are expected to complete the legal formalities.
According to RPL’s initial public offering, Chevron was one of the two promoters of RPL. The US firm had also entered into a non-binding memorandum of understanding to supply around 35% of RPL’s crude requirements and buy up to 45% of its final produce at a price to be negotiated later. Parallel to such agreements, it also had an option to buy another 24% of RPL from RIL at a 5% discount to the market price.
RIL on Monday said Chevron was not interested in pursuing the agreement and, as such, it (RIL) had exercised the right to buy back the 5% stake Chevron already had. “A few days ago, we made the decision and communicated (to Chevron) that, under the original agreement, we had the right to buy back the shares that Chevron has at Rs 60 a share, and that the right has been exercised by us. That has been acknowledged by Chevron,” RIL’s chief finance officer Alok Agarwal said.
The Wall Street Journal quoted Chevron as pointing to “attractive investment alternatives and continuing low global demand for refined products” as the principle reasons for its decision to pull out.
An RIL official, speaking on condition of anonymity, acknowledged that Chevron seems to have changed its “outlook” towards investing in the refining sector due to the drop in oil prices and refining margins.
Despite this, Agarwal said the company has already put in place the supply and off-take agreements for the new refinery. “Over a period of time, we have been able to put in place arrangements to buy crude, for both the refineries [and] arrangements to supply products,” he said, adding that the cancellation of the investment will not impact RIL’s normal trading relationships with Chevron.
With Chevron’s exit, RIL will issue 6.92 crore new shares to the minority shareholders of RPL, who hold 24.4% of the company, at the rate of one RIL share for every 16 RPL shares held.
The 75.6% promoter holding, including the 70.6% that RIL held and 5% bought back from Chevron will stand extinguished. The exercise will see the number of outstanding shares of RIL go up by 4.23%.
Agarwal said the average profit per share is likely to increase for the merged entity. “It [the transaction] will add much more than 4.4% to RIL’s earnings,” he pointed out. RPL too will benefit from the size of the combined entity. “This merger is about size.. There are only 15 to 20 large energy players in the world and we are going to be one of them. This gives us the ability to take on projects which are much larger in size than we have done before,” he said.
He accepted that there was a chance that there would be a lack of demand in the refining sector, but said RIL’s refining business, with a total capacity of around 1.24 million barrels per day, will weather the storm better as it was more efficient than most others. “It [refining demand] may go down by 1 million barrels [per day], as some people are forecasting... [However,] complex refining margins are at least $3 to $4 higher [per barrel] than simple refining... there is a strong case for us to earn the kind of refining margins that are well above the historical averages,” he said.
According to the transaction, advised by Kotak Mahindra Capital and JM Financial, each RPL share is now worth 6.25% of an RIL share. RPL closed at Rs 75.15, 6.13% of RIL’s closing price of Rs 1225.15. The issue of new shares will take place only after several months, during which period the two companies are expected to complete the legal formalities.
