RIL mops up Rs 2,675 cr for M&A war chest

Reliance Industries on Monday raised Rs 2,675 crore selling shares held by its treasury to build a war chest probably to buy the bankrupt petrochemical major LyondellBasell, for which it may have to pay over the odds, as the global economic recovery brightens the prospects for even bankrupt companies. 

The country’s largest private sector company sold 25.85-million treasury stocks — created eight years ago following the merger of Reliance Petroleum with RIL — to state-owned Life Insurance Corporation, which is the largest institutional shareholder in the company with a six per cent stake. 

RIL, which has submitted a non-binding bid to buy a controlling stake in the Rotterdam-based Lyondell, has been raising funds, as analysts estimated it to value the target at around $12 billion when it had first made public on November 21 its intention to buy the bankrupt petrochemical company. Subsequently, Lyondell submitted a revised plan on December 24 to the bankruptcy court in the US. 

The plan involves a $2.8-billion rights share sale and conversion of about $18 billion of debt into equity, which analysts believe may force RIL to raise its bid beyond the estimated $12 billion. 

The latest share sale, the amount of treasury stock in its vaults and its relatively low debt, could help RIL raise the bid without much struggle to fund the takeover, analysts said. 

“RIL holds another 343 million treasury stocks, valued at nearly $8 billion at the current market price, and cash and cash equivalents worth $4.65 billion,” said Maulik Patel, head of research at KR Choksey Securities. 

“RIL’s net debt to equity of 0.4x gives ample opportunity to leverage its balance sheet. We calculate RIL can borrow another $11 billion to remain within debt / equity ratio of 1.0x and will have $23.7 billion financing available.” 

RIL confirmed the share sale at an average price of Rs 1,035 apiece, five per cent lower than Thursday’s closing. This is the second treasury stock sale in less than four months. In September, it raised Rs 3,188 crore selling 15 million shares. RIL ended the day 1.2% lower at Rs 1,075 on BSE. Citigroup and Bank of America-Merrill Lynch were arrangers for the share sale. 

Even as the Lyondell battle is fought in the bankruptcy courts, there could be other targets for RIL, says a banker familiar with the company’s strategy. 

The unsecured creditors of Lyondell opposed the reorganisation plan, which keeps the doors open for RIL. The deadline for other stakeholders to challenge the reorganisation plan is Tuesday, but RIL can’t oppose. 

RIL had started back-room discussions with the secured and unsecured creditors of Lyondell as it finalises an official financial bid, a person close to the matter said, but did not provide a timeline for it. 

But it may be a long-drawn affair in the US courts, as Lyondell officials, who did not want to be identified, said that RIL’s reported $12-billion bid may be too low. 

“We don’t think RIL’s initial bid has any merit,” an official at Access Industries, promoted by Russian-born billionaire Len Blavatnik, told ET in early December. The value was “too low”, he had said. 

Apollo Management, an affiliate of Access Industries, and Ares Corporate Opportunities Fund are among firms committed to buy shares in the rights offer. 

LyondellBasell was formed in December 2007 when Basell, a unit of billionaire Len Blavatnik’s Access Industries, paid $12.7 billion for the Houston-based Lyondell Chemical. 

LyondellBasell could create long-term synergy for RIL due to its technological capability, wide distribution and larger bargaining power of the combined entity, said KR Choksey’s Mr Patel.

Source: Economic Times

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