RIL: Adding downstream assets

The LyondellBasell acquisition will undoubtedly catapult the company into the big league.

The timing of Reliance Industries’ (RIL’s) non-binding cash bid for bankrupt petrochemicals player, the $50.7 billion LyondellBasell, is accurate. With the petrochemicals cycle just about emerging from the trough, or perhaps still in there, asset prices would be somewhere close to the bottom. With fresh capacity expected to enter the market next year from the middle east, supply may continue to outstrip demand for another two years.

Moreover, industry watchers point out that petrochemicals producers in the middle east are quite competitive as they access gas at rates as low as $1 per mbtu. According to analysts, while demand is picking up, prices could remain sluggish and margins might fall even further from the current levels. They are also cautious about the operational synergies from such a downstream acquisition, pointing out that Reliance hasn’t really run a global operation of this size, with 50 manufacturing sites across 20 countries, even if it enjoys a tremendous track record when it comes to implementing big projects at home.

No one doubts that Reliance will get itself a good bargain, as it may negotiate shrewdly. Besides, it would be in a position to pay in cash, given the cash balances of close to $4 billion, and so would be able to clinch the deal at a better valuation than other bidders. Apart from the discounted value of the debt on LyondellBasell’s balance sheet, Reliance would take note of the fact that the petrochemical major has facilities in Europe and North America, and therefore, it could take time before they become more financially efficient.

Some of the manufacturing facilities, analysts point out, use naphtha as feedstock. Reliance would take these factors into consideration while trying to achieve the larger objective of building scale.

The company’s idea is to try and get a bigger share of the global market. LyondellBasell is the world’s third largest petrochemicals company, while Reliance has a global market share of about 8 per cent; though its share in the home market is 60 per cent. Reliance can also leverage the global firm’s distribution channels. Reliance’s petrochemicals business did well in the September 2009 quarter, posting strong volumes and margins which grew 4 per cent sequentially. It was the lower than anticipated gross refining margins (GRMs) which pulled down the overall refining margins. Consequently, the company’s earnings fell six per cent year-on-year, though it rose five per cent sequentially.

Source: Business Standard

__________________________________________________________________________________