The making of a mega-entity

Published : Apr 13, 2002 00:00 IST

The Ambanis do it again. The country's largest-ever private sector company is born.

BUILDING a Fortune 500 corporation is perhaps every industrialist's dream. Yet, only one person from the Indian subcontinent has achieved this - Dhirubhai H. Ambani. On April 1, with the merger of Reliance Industries Limited (RIL) and Reliance Petroleum Limited (RPL) was formed the country's largest-ever private sector company. The combined entity is a Rs.59,572-crore company with over 35 lakh shareholders, the third-most widely held company in the world. It now ranks 426th in the Fortune Global 500 list and is among the top 50 global energy-petrochemical companies in terms of sales and profits.

The merger had been expected for some time. Finally, the day after the presentation of Budget 2002, the Ambanis stated their intent to merge the Rs.28,390-crore RIL and Rs.31,182-crore RPL. The Budget had announced that effective April 1, the administered price mechanism (APM) for the petroleum sector would be dismantled, which meant that most price and distribution controls on companies in the sector would be lifted. Refineries such as those of RIL, which handles 25 per cent of the oil refined in India, would now be allowed to enter petroleum retailing. Much of Reliance's success lay in pouncing on an opportunity and not sparing a moment when it came to building its empire.

Anil Ambani, managing director of RIL, announced the merger at a press conference on March 3. He said that the boards of RIL and RPL had unanimously approved the merger with a swap ratio of one RIL share for every 11 RPL shares. Critics, however, say that the ratio does not reflect the true worth of RPL. The company says the ratio was arrived at by swap ratio specialists from a global accounting firm and there would be no reason to doubt their methodology. RIL's share capital has expanded by 32 per cent with the merger.

Explaining the rationale behind the merger, Anil Ambani said: "There were significant benefits of scale, of complete integration, cost efficiencies and productivity gains, and optimisation of fiscal incentives." But in order to become a fully integrated energy company, which is Dhirubhai Ambani's ambition, the two Reliance companies had to merge, say analysts. All global energy giants such as Shell and Exxon are vertically integrated, owning the entire chain of operations ranging from exploration to production and from refining to distribution. Reliance's products range from synthetic fibres, fibre intermediates and petrochemicals to polymers and its operations include oil and gas production.

A spokesperson for the company told Frontline that "the merger was proposed in the context of the ongoing economic reforms.''It takes into consideration factors such as the continued progress in hydrocarbon sector reforms and deregulation; dismantling of APM in the refining industry; the government's decision to grant marketing rights for the transportation of fuels to the private sector and the proposed disinvestment of public sector oil companies.

Analysts and industry observers whom Frontline spoke to - but who prefer to remain unnamed - say that it is critical for Reliance to acquire a marketing network. With the APM dismantled, the company needs assured outlets for its products. It would cost them upwards of Rs.5,000 crores and at least four years to establish a significant marketing presence in the country. Besides, it would be a cumbersome route to achieve their objective. "What could be more perfect for Reliance than a readymade set-up in Hindustan Petroleum Corporation Limited (HPCL) and Bharat Petroleum Corporation Limited (BPCL)," asks an analyst. Both public sector undertakings (PSUs) are up for disinvestment. HPCL has about 4,600 retail outlets and BPCL approximately 4,500, which make either PSU a perfect target for acquisition by Reliance. But Reliance will face stiff competition from global oil giants such as Shell, Exxon-Mobil and Chevron. In addition, the Indian Oil Corporation (IOC) will probably seek to join the bidding race. This is likely to make the acquisition price for both PSUs steep, and accordingly the combined balance sheets of RIL and RPL will provide the Reliance group with the capability to raise the required funds (estimated at Rs.7,000 crores) for the acquisitions. Reliance had come up against IOC when the government began the disinvestment of IBP, another oil-marketing PSU. IOC left Reliance smarting when it paid a hefty Rs.1,154 crores for 33.58 per cent of the government's stake in IBP. This represented more than double that of Reliance's bid.

A report on the RIL-RPL merger by investment bankers Salomon- SmithBarney says: "The merger would provide the joint entity with enhanced financial muscle to foray into petroleum marketing by acquiring an incumbent or setting up its own infrastructure." It also aims at preparing RPL for the challenges posed by India's oil sector deregulation.

The report says that the Reliance Group is on a strong footing to raise funds as "the merged company boasts of world class assets and an enviable market." It points out that the Reliance Group has over 175,000 square kilometres in oil and gas exploration and production acreage, making it India's largest private sector player in the fields of exploration and production. It has the world's fifth largest refinery at Jamnagar with a 25 per cent share in domestic refining capacity, a domestic market share of 53 per cent in fibres and 50 per cent in plastics. It is the second largest producer in the world of polyester filament yarn/polyester staple fibre, the third largest producer of paraxylene, the fourth largest producer of purified terephthalic acid and the sixth-largest producer of polypropylene. The company owns 26 per cent of Reliance Telecom, which has a subscriber base of over 3,65,000. Additionally, it has a 45 per cent stake in Reliance Infocom, which is laying out a nationwide broadband network and a 34 per cent stake in BSES, which is engaged in power generation, transmission and distribution. Because of this substantial backing, the company says it can raise up to Rs.11,000 crores in debt to fund acquisitions.

Obviously the merger will have several benefits. Anil Ambani says that RIL enjoys a better credit rating and greater foreign institutional investor (FII) confidence than RPL. RIL's debt rating post-merger will remain the same at AAA+. RPL, however, has a slightly lower rating and consequently relatively higher cost. The merger should allow the cost of this debt to be reduced to the levels enjoyed by RIL.

Further, sizeable portions of RPL's sales are made to RIL. The merger will eliminate the impact of sales tax on these sales. Savings on these two counts alone are expected to be substantial. "This is classically Dhirubhai's first brush-stroke on the master plan," an analyst told Frontline. Through financial engineering, about 12.2 per cent of the share capital of RIL, worth approximately Rs.5,000 crores, will be parked with a Trustee at current market values. This stake may be sold to raise funds to implement the future plans of the group. Or, it could be used to strike a strategic financial partnership. "And this is Dhirubhai's master stroke," says the analyst. While the reasons given for the merger may be strategic ones, the company is expected to gain significantly in financial terms as well.

While many an industrialist has reasons to worry about the impact of the ongoing process of liberalisation on his enterprises, the Ambanis would seem to have thrived on it. The Reliance Group's financials show that sales in 1991 - when the reforms process began - were Rs.2,953 crores. The figure skyrocketed to Rs.28,008 crores in 2001. Yet, now, in the same environment, it seems Dhirubhai needs to try to stay afloat. Detractors of the Reliance Group say that it survived as a result of protection from high import tariffs. With a low duty regime looming large, RIL will be exposed to competition from both domestic and international players. More than the global petroleum giants, IOC, with Rs.1,18,589 crores in sales, is clearly its formidable rival. The largest Indian PSU, which is incidentally the only other Indian company to be listed on the Fortune 500 list, IOC also owns 7,500 outlets across the country.

Dhirubhai Ambani is well known for his ability to horn into lucrative areas. Apart from oil and gas exploration and production, the company is venturing into areas of the New Economy. Under the banner of Reliance Infocom, the group is setting up a broadband network across the country. This will provide the full range voice, data and image-related services. In addition, Reliance has entered the field of biotechnology. A stem cell laboratory was set up in Mumbai last year. Given Dhirubhai Ambani's determination to build an empire, as seen in the past 25 years, it would be surprising if he does not make a success of this current as well as his new ventures.

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