2007/3/10 Reliance

Board of Directors of IPCL and RIL approve merger
IPCL shareholders to receive one share of RIL for five shares held in IPCL
Proposed merger is earnings accretive for shareholders of RIL
IPCL’s shareholdes set to benefit from RIL's superior performance and growth momentum

The Board of Directors of Reliance Industries Ltd (RIL) and Indian Petrochemicals Corporation Limited (IPCL) have unanimously approved the scheme of merger of IPCL with RIL, subject to the necessary regulatory & shareholder approvals.
RIL is India’s largest private sector company with a leadership position in the petrochemicals industry while IPCL is India’s second largest company in that sector. As part of the divestment program of the Government of India, RIL acquired 26% equity in IPCL in the year 2002 and thereafter increased its holding to 46% through an open offer.
Over the last five years of IPCL’s operations, with the support of Reliance management several initiatives were introduced to increase capacity utilization, reduce operating costs and improve financial management. This has resulted in ongoing improvement in financial and operating performance at IPCL with revenue increasing from Rs 5,527 crore in FY 2001-02 to Rs 12,362 crore in FY 2005-06, a CAGR of 22% and net profit increasing from Rs 107 crore in FY 2001-02 to Rs 1,164 crore in FY 2005-06, a CAGR of 82%. The improvement in financials has led to a significant improvement in IPCL’s capital structure, with IPCL becoming debt free on net basis as compared to a net debt of Rs 3,482 crore in March 2002.
RIL has a diversified portfolio of businesses in the form of oil and gas, refining and marketing, petrochemicals, organized retail and development of Special Economic Zones.
RIL has plans to make significant capital investments in all its core businesses to pursue growth opportunities. On the other hand, IPCL’s business portfolio predominantly consists of commodity polymers, which makes it prone to earnings volatility and cyclical risk. The merger provides shareholders of IPCL an opportunity to de-risk their investment by participating in the growth opportunities at RIL.
The merger will be earnings accretive for RIL’s shareholders at the proposed merger ratio.
This merger will also facilitate the integration of management resources with economic interest while providing for free flow of products and intellectual capital between the two companies.
The proposed merger is in line with industry trends, which will help achieving scale, size, integration, and enhanced financial strength along with the flexibility to pursue future growth opportunities, both organic and inorganic, within and outside India.
Commenting on the merger, Mukesh D. Ambani, Chairman & Managing Director, RIL, stated, “With this merger, I am happy to welcome all IPCL shareholders to the RIL family. This merger will create value through synergies and scale that shall enhance the sustainable competitive advantages of RIL. This merger will be earnings accretive for the shareholders of RIL and shall provide shareholders of IPCL an opportunity to participate in RIL’s diversified business portfolio.”

Consolidated Production of Key Petrochemical products (‘000 tonnes)*

* Production is based on production for the nine months period ended 31st Dec 2006, as annualized, for comparison purpose only.

Merger Details:
The appointed date of merger of IPCL with RIL is April 01, 2006. Under the terms of the proposed merger, IPCL shareholders will receive 1 share of RIL for every 5 shares of IPCL held by them. The exchange ratio has been determined on the basis of a Valuation Report by PricewaterhouseCoopers and Ernst & Young, jointly appointed. JM Morgan Stanley and DSP Merrill Lynch are the Financial Advisors. Amarchand & Mangaldas & Suresh A Shroff & Company are the Legal Advisors.
The share capital of RIL post merger shall increase from Rs 1,393.5 crore to Rs 1,453.6 crore.
RIL’s associate companies hold 47.3% of IPCL’s equity share capital. These shares will be exchanged for equity shares of RIL having current market value of over Rs 3,700 crore, and will constitute 2% of the enhanced equity share capital of RIL. The associates will hold the shares for the benefit of all the shareholders of RIL and could monetize the economic value at an appropriate time in the future. These shares could be offered to financial or strategic investors in domestic or international markets.
Board of Directors of RIL approved an interim dividend of Rs 11 per share amounting to Rs 1,748 crore including dividend tax.
Board of Directors of IPCL approved an interim dividend of Rs 6 per share amounting to Rs 206 crore including dividend tax.

Reliance Industries Limited:
Reliance Industries Limited (RIL) is India’s largest private sector company on all major financial parameters with turnover of Rs 89,124 crore (US$ 20 billion), cash profit of Rs 13,174 crore (US$ 3 billion), net profit of Rs 9,069 crore (US$ 2 billion), net worth of Rs 49,804 crore (US$ 11 billion) and total assets of Rs 93,095 crore (US$ 20.9 billion).
For the nine months period ended December 31, 2006, RIL’s turnover was at Rs 83,487 crore and net profit was at Rs 8,055 crore.
RIL is the first and only private sector Company from India to feature since 2004 Fortune Global 500 list of ‘World’s Largest Corporations’ and ranks amongst the world’s Top 200 companies in terms of profits. RIL emerged in the world’s 10 most respected energy/chemicals companies and amongst the top 50 companies that create the most value for their shareholders in a global survey and research conducted by PricewaterhouseCoopers and Financial Times in 2004. RIL also features in the Forbes Global list of world’s 400 best big companies and in FT Global 500 list of world’s largest companies.

Indian Petrochemicals Corporation Limited:
IPCL was established in March 1969 as Government of India Undertaking, with the objective of establishing a petrochemicals company and developing the petrochemicals market in India.
IPCL is India second largest petrochemicals company with turnover of Rs 12,362 crore (US$ 2,771 million), cash profit of Rs 1,727 crore (US$ 387 million), net profit of Rs 1,164 crore (US$ 261 million), net worth of Rs 4,970 crore (US$ 1,114 million) and total assets of Rs 10,547 crore (US$ 2,364 million).
For the nine months period ended December 31, 2006, IPCL’s turnover was at Rs 10,307 crore and net profit was at Rs 1,014 crore.
IPCL operates three integrated petrochemicals complexes in India - a naphtha based cracker complex at Vadodara; a gas based cracker complex each at Gandhar and Nagothane. The polymer business of IPCL primarily encompasses commodity plastic raw materials namely Polypropylene (PP), Polyethylene (PE) and Poly Vinyl Chloride (PVC).
The fibre intermediates business of IPCL encompasses Mono Ethylene Glycol (MEG). In FY 2005-06, IPCL made its foray into Polyester by acquiring six polyester manufacturing companies and thereby changed its business model by becoming an integrated petrochemical company.

Effective April 1, 2005, the six polyester companies namely Appollo Fibres Limited (AFL), Central India Polyesters Limited (CIPL), India Polyfibres Limited (IPL), Orissa Polyfibres Limited (OPL), Recron Synthetics Limited (RSL) and Silvassa Industries Private Limited (SIPL) have been amalgamated with IPCL. This marks the entry of the Company in the polyester sector. The polyester units are based in Hoshiarpur (Punjab), Nagpur (Maharashtra), Barabanki (Uttar Pradesh), Baulpur (Orissa), Allahabad (Uttar Pradesh) and Silvassa (Gujarat).

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Reliance Industries Limited operates world-class manufacturing facilities at Naroda, Patalganga, Hazira and Jamnagar, all in western India.

The Naroda facility, near Ahmedabad was commissioned in 1966. The synthetic textiles and fabrics manufacturing facility at Naroda manufactures and markets woven and knitted fabrics for home textiles, synthetic and worsted suiting and shirting, dress material, saris and ready to wear garments. The textile plant is spread over 150 acre site.

The Patalganga complex, near Mumbai, has polyester, fibre intermediates and linear alkyl benzene manufacturing plants. The manufacturing facility at Patalganga which was established in 1988 and is spread over 200 acres of land.

The Hazira complex, near Surat, has a naphtha cracker feeding downstream fibre intermediates, plastics and polyester plants. The manufacturing facility at Hazira which was established in 1991 and is spread over 700 acres of land.

The Jamnagar complex has a petroleum refinery and associated petrochemical plants making plastics and fibre intermediates. The manufacturing facility at Jamnagar was commissioned in 1999. It is spread over 7,400 acres of land.

The fiber intermediates manufacturing facility at Kurkumbh was the Glycol division of SM Dyechem Limited and was acquired by the Company in 2005.

Each of these complexes has world class manufacturing facilities.

Hazira Plants and Capacities

Plants	Licensor Technology	Startup	Capacity ( KTA ) Installed
Cracker	S & W	Mar. 1997	750
PE 1	Du Pont	Jul. 1992	160
PE 2	Nova	May 1997	200
PP	UCC	Sep. 1996	360
Aromatics	HRI/Mobil	Mar. 1997	350
MEG 1	Shell	Sep. 1991	100
MEG 2	Shell	Mar. 1997	120
MEG 3	Shell	Oct. 1997	120
PVC	Geon	Dec. 1991	160
VCM	Geon	Apr. 1992	160
PTA 1	ICI	Jan. 1997	350
PTA 2	ICI	Nov. 1997	350
PET	Sinco	Oct. 1997	80
POY	Du Pont	Dec. 1995	120
PSF	Du Pont	Sep. 1996	160
PFF(Polyester Film/Foil.)	Du Pont	Oct. 1997	30

Patalganga

Plant	Process Licenser	Start up date
Polyester Filament Yarn (PFY)	Du Pont	Oct.1982
Polyester Staple Fiber (PSF)	Du Pont	Mar.1986
Purified Terephthalic Acid (PTA)	ICI (U K)	Feb.1988
Paraxylene Plant (PX)	U.O.P (USA)	Nov.1988
Linear Alkyl Benzene Plant (LAB)	U.O.P (USA)	Nov. 1987
L A B (Front End)	U.O.P (USA)	Mar.1992
A-3 Tank Farm		May 1992
Reliance Industrial Infrastructure Limited Pipe line from BPCL to PG		May 1992

　

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IPCL

BARODA COMPLEX	NAPHTHA CRACKER	ABB Lummus, UK	ETHYLENE :175,000
	BUTADIENE	UOP, USA	54,000
	Benzene	UOP, USA	55,000
	LDPE	ATO Fina, France	95,000
	PP	Bassel, Italy	100,000
	PPCP	Bassel, Italy	35,000
	PBR-I	Polysar, Switzerland	20,000
	PBR-II	JSR, Japan	40,000
	PVC	Oxyvinyls, USA	55,000
GANDHAR COMPLEX	GAS CRACKER	STONE & WEBSTER, USA	ETHYLENE : 300,000
	CHLOR ALKALI	KRUPP UHDE GMBH,GERMANY	CAUSTIC LYE 133,000 CHLORINE 115,000
	VCM	INEOS Vinyls Ltd, UK ( Previous name was INOVYL, BELGIUM )	170,000
	PVC	OXYVINYLS, USA	150,000
	EO/EG	SCIENTIFIC DESIGN, USA	120,000
	HDPE	BASELL, GERMANY	160,000
NAGOTHANE COMPLEX	GAS CRACKER	Stone & Webster, USA	ETHYLENE : 400,000
	EO/EG	Union Carbide, USA	EG : 50,000 EO : 5,000
	LDPE	CdF Chimie, France	80, 000
	LLDPE/HDPE	BP Chemicals, UK	220, 000
	PP	Himont, Italy (now Basell, Italy）	60, 000
	BUTENE-1	IFP, France	15,000
	Wire & cable compound	B P Chemicals, UK	12, 500
	DHC	IPCL, R&D	60

Polyester Units
Effective April 1, 2005, the six polyester companies namely AFL), Central India Polyesters Limited (CIPL), India Polyfibres Limited (IPL), (OPL), (RSL) and (SIPL) have been amalgamated with IPCL.

Recron Synthetics Limited	Allahabad Unit, Uttar Pradesh	PFY - 66.,000
India Polyfibres Limited	Barabanki Unit, Uttar Pradesh	PSF - 40,000
Orissa Polyfibres Limited	Dhenkanal Unit, Orissa	PSF - 35,000
Appollo Fibres Limited	Hoshiarpur Unit, Punjab	PSF - 51,681 POY - 14,870 PFF (Conjugate)-28,330 PFF (fibrefill)-10,630 Chips - 14,600
Central India Polyesters Limited	Nagpur Unit, Maharashtra	POY - 45,000
Silvassa Industries Private Limited	Silvassa Unit, Union Territory of Dadra and Nagar Haveli	PFY - 141,000 PTT - 600

　

2007/3/11 thehindubusinessline.com

Reliance and IPCL: A plastic merger
http://www.thehindubusinessline.com/iw/2007/03/11/stories/2007031101181100.htm

Though it is the obvious thing to do given that they are in the same business, there are no compelling benefits flowing out of the merger of IPCL with Reliance.

The proposal to merge Indian Petrochemicals Corporation Ltd (IPCL) with Reliance Industries, now that it has been announced, appears a natural and obvious move, given that both operate in the same industry. More so, if you consider the Reliance track record of merging group companies with the flagship.

The Reliance Industries that we know today is an amalgam of Reliance Petrochemicals Ltd (which implemented a part of the Hazira complex), Reliance Polyethylene Ltd, Reliance Polypropylene Ltd (these two were floated to implement another part of the Hazira complex) and Reliance Petroleum Ltd (the original entity that was floated to implement the Jamnagar refinery).

Yet, the proposal seems to have caught the market by surprise for two reasons. First, the Reliance Industries and IPCL Chairman, Mr Mukesh Ambani, while speaking at the IPCL AGM barely 20 months ago in June 2005, had ruled out any move to merge the two companies.

Second, the IPCL-Reliance merger is unlike any of the other instances quoted above in that it is not something that will bring in significant synergies more than what has already been achieved by the two in their independent avatars.

Operational synergies achieved

The core function of marketing and sales was combined within a year of the acquisition of IPCL by Reliance in 2002, with agents selling both brands of polymers and fibre/fibre intermediates. Synergies have also been achieved in product exchanges between the two - Reliance supplies naphtha for the Vadodara cracker of IPCL and also minor quantities of ethylene to the Gandhar complex.

What the merger will help achieve is to rationalise the other functions of finance, secretarial and HR where there could be some synergies to be achieved. But the cost-savings and efficiency improvement here cannot be significant enough to justify a merger of the two companies.

The combined entity will produce more of the same products such as polypropylene and polyethylene and a couple of new products in polybutadiene rubber and acrylic fibre, products that Reliance does not produce now.

The merger will also diversify the feedstock profile of Reliance, which now runs its cracker - the mother unit of a petrochemical complex - on naphtha. IPCL's crackers at Nagothane (Maharashtra) and Gandhar (Gujarat) use natural gas as feedstock.

There are other aspects being discussed as providing the rationale for the merger such as the use of Krishna-Godavari Basin gas in IPCL's crackers and the fact that the merger would add Rs 11,000 crore to Reliance's balance-sheet helping it to raise further resources.

Nothing prevented Reliance from supplying K-G Basin gas to IPCL when it remained an independent entity and, again, the character of the K-G Basin gas is not known yet. For use in a petrochemical cracker, the gas has to have molecules of ethane and propane apart from methane itself.

The swell on the Reliance balance-sheet, post-merger, will be nothing noticeable, given that it is already about Rs 1,00,000 crore in size; adding Rs 11,000 crore to it will make but a marginal difference.

Again, Reliance has traditionally taken the equity route to growth which is why it has a very low debt-equity ratio. There is enough elbowroom for Reliance to borrow more and adding IPCL's balance-sheet is not really going to make an impact there.

So what is the rationale for the merger now? One factor motivating the merger could be the losses accumulated by Gujarat Chemical Port Terminal Company Ltd (GCPTCL), a company where IPCL is a joint promoter with a few other Gujarat government-owned companies. GCPTCL operates a chemical port terminal with a jetty at Dahej and is deeply in the red. A merger of GCPTCL with IPCL, before the latter's merger with Reliance, could bring in a significant tax shelter for Reliance.

But, again, this is still in the speculative domain and requires the consent of the joint venture partners of IPCL. Reliance could also be seeking to capitalise on the run-up in its stock value in recent times which will enable a relatively more favourable share exchange ratio.

Petrochem monolith

Speculation on the rationale for the merger aside, what it will achieve is in creating a monolith petrochemical company that will hold approximately half the polymer market in the country; in some specific products such as polypropylene, the Reliance-IPCL entity will hold more than three-quarters share of the market. Some rationalisation of capacity and product lines will probably materialise to unlock value from the merger.

There is the question of what to do with the Vadodara complex of IPCL, which is about four decades old with capacities that do not help in deriving scale economies.

Scaling up the capacity is a problem because, with the city expanding around the complex, questions of environmental pollution and safety arise.

The cracker now runs on naphtha supplied by Reliance from its Jamnagar refinery. Capacities of the other two crackers of IPCL at Nagothane and Gandhar may also have to be scaled up, but the critical factor here will be availability of the feedstock ? natural gas rich in ethane and propane.

Reliance has already announced plans for a new two-million tonnes per annum mother cracker with downstream units at Jamnagar and it remains to be seen how IPCL's expansion plans are married to this.

Valuation issues

Between the shareholders of Reliance Industries and IPCL, the merger appears more favourable to the latter. IPCL is a pure petrochem play with its revenue and earnings subject to commodity price cycles. Reliance, though still largely a commodity play, is better balanced between oil refining and petrochemicals.

About two-thirds of its revenues comes from oil refining and the restfrom petrochemicals, but when it comes to earnings, both businesses contribute in almost equal measure.

The presence in businesses such as retail, oil exploration and production (E&P), and life-sciences also lends better balance to the revenue and earnings streams. Of course, this picture could change if the company were to hive off its E&P and/or retail businesses.

For Reliance shareholders, the merger does not bring in anything extraordinary, even as it dilutes the equity capital by about 4 per cent from Rs 1,393 crore now to Rs 1453 crore, post-merger.

The merger would add about 12 per cent each to Reliance's revenues and earnings this fiscal (extrapolated latest nine-month earnings).

The stock price movement in the two days of trading since the first announcement of the merger reflects this clearly.

While the IPCL stock is up 16 per cent from Rs 231.65 to Rs 268.6, the Reliance stock is up by just 2.2 per cent in the same period. The share exchange ratio of one Reliance share for every five IPCL shares appears balanced in relation to the prevailing market prices of the two stocks, though from a book-value perspective it appears weighted heavily in favour of Reliance.

As of March 31, 2006, the book value of a Reliance share is Rs 324 and Rs 198 per share of IPCL.

An interesting aspect to take note is that the government holds 10.40 lakh shares accounting for 0.35 per cent of IPCL's equity capital as per the filing to the stock exchanges in January 2006.

Assuming that the government has already not sold this stake, it would become a shareholder in Reliance as a consequence of the merger, holding 2.08 lakh shares!