Under the terms for the merger, Reliance Petroleum Ltd. (RPL) shareholders received 1 (one) share of Reliance Industries Ltd. (RIL) for every 11 (eleven) shares of RPL held by them.
The merger was in retrospective effect from April 1, 2001 after getting approvals from the Bombay High Court and High Court of Gujarat. The merger represented the first full year of commercial operations of RPL.
Under the proposed terms of the merger, shares of RPL held by RIL, representing 28% of RPL's equity share capital was cancelled.
The exchange ratio has been determined on the basis of a Valuation Report by Valuation Advisors, Price Waterhouse and SB Billimoria & Co. (member of Deloitte Touche Tohmatsu International), jointly appointed by RPL and RIL.
For determining the exchange ratio, the value per equity share of RIL and RPL have been determined using three different methods:
Net Asset Value (NAV) method,
Earnings Value (EV) method, and
Market Value (MV) method
The Net Asset Value (NAV) of a share is based on the historical cost of the company's assets, and usually represents the minimum value or support value of a share of a going concern. The Earnings Value (EV) per share is obtained by capitalising the company's maintainable earnings at an appropriate rate reflecting the company's risk reward profile.
The Market Value (MV) of a share is determined on the basis of the weighted average price of the share for a period of six months. [1]
The Merger Approved
The Shareholders of Reliance Petroleum Ltd. (RPL) approved the merger of RPL with Reliance Industries Ltd. (RIL), at the shareholders' meeting with an overwhelming majority representing 99.99% in value of members present and voting. The resolution was supported by all categories of shareholders, including international and domestic institutional investors, and retail investors.
The shareholders of RIL had already approved the merger of RPL with RIL, on 8th April, 2002, with an overwhelming majority representing 99.95% in value of members present and voting.
With the passing of resolution by the shareholders of RPL the merger of RPL with RIL stood approved by shareholders of both RIL and RPL.
Advisors to the Merger
Financial Advisor:
JM Morgan Stanley
Legal Advisors:
Amarchand & Mangaldas
Suresh A. Shroff & Co.
Other Advisors:
Mr. Arun Gandhi of N.M.Raiji & Co.
Mr. Bansi Mehta of Bansi Mehta & Co.
Mr. N.V.Iyer of CC Chokshi & Co.
RPL Background - From Inception to Before Merger
The Project:
As a 1st step in the direction towards establishing a vertically integrated Reliance group, Reliance Refineries Pvt. Ltd was incorporated in Sep.'91, which later got renamed to Reliance Petroleum (RPL) in Apr.'93.
The refinery project was initially conceived with a capacity of 9 MTPA, with a project cost of Rs 5142-crore (US$ 1.23 bn), comparable to the total size of the assets of RIL at that time. The project's estimated time to completion was 5 years. However the project was delayed. The delays were explained by the fact that the group kept scaling up the proposed capacity - to 15 MTPA, 18 MTPA and eventually 27 MTPA. The refinery finally commenced production in Year 2000 at a project cost of Rs 14,250-crores (US$ 3.40 bn). It became the world's largest grassroots refinery and the seventh largest refinery in the world at any single site coming at a cost which was a 30% discount on capital cost per tonne basis compared to some other refineries set up by other international companies during the same time, in Asia.
The Financing:
The refinery was floated as a part of separate company, Reliance Petroleum (RPL), promoted by Reliance Industries (RIL), instead of being built as a part of the RIL itself. Had that been the case then the funds for the project would have been acquired by issue of fresh equity of RIL at around the market price of RIL shares at that time and by taking fresh debt on the balance sheet of RIL. The prevalent debt/equity ratio for the projects of such nature and size used to be 1.5. However, the project finally commenced as a part of a separate company, RPL, and was initially financed through issue of securities whose design was revolutionary at that time.
The company (RPL) came out with a Rs 2,749-crore (US$ 0.65 bn) public issue of triple-option convertible debentures (TOCD), in Sep.'93, the largest ever public offering by an Indian company then, to part-finance the Rs 5,142-crore (US$ 1.22 bn) grass root refinery at Jamnagar, Gujarat. The issue was oversubscribed, mainly on account of RIL's tag and the inventive nature of TOCD. RPL enjoyed the support of 2 million international, domestic, institutional and retail shareholders. This was the second largest investor base in the Indian corporate sector next only to RIL.
The reason the instrument was designed in the manner can be explained as follows:
The time before the first barrel of oil was to be refined was 5 years. The instrument was such that no cash out flow was expected during the first five years. Moreover, warrant conversions were allowed only after 48 months of the Initial Public Offer (September 1997). That was just 1 year before the expected commencement of the refinery operations. The management expected this fact to be reflected in the higher share price of RPL facilitating the conversion of warrants which in turn would have resulted in more funds coming into the project to make possible any future expansions of the refinery. Moreover, the principal and the interest payment corresponding to the non convertible portion of the instrument were supposed to be paid out only during the 6th, 7th and 8th year after the IPO. By this time the refinery was expected to be in its 1st, 2nd and 3rd year of operation respectively and would have been able to generate enough funds to service the payout.
After 48 months of the IPO the project was already in its 5th year of existence and its commissioning was not expected for another at least 2-3 years. The delay was on account of increased capacity plans which also escalated the planned capital expenditure to almost three times that of the original. RPL was then on a look out for more funds since the moment to remit the non convertible part of the debentures was approaching and the revenue stream from the project was nowhere in picture.
In Sept 1997, when the warrant conversion was first allowed as per the original arrangement the shares of RPL were trading at Rs 22 where as the non- convertible debenture was trading at around Rs. 48 and the two warrants could be sold for Rs 5 each in the market. Thus the value of debentures and the two options was more than the value of the two shares. In order to make warrant conversion a possible option at that time and to make it more attractive to the investors the Reliance Petroleum board decided to offer a fourth option to TOCD holders
The fourth option gave the investors an option to convert their non-convertible portion of the TOCD into three equity shares at a price of Rs 10, Rs 15 and Rs 15 to be issued in 1999, 2000 and 2001 respectively. The cost per share would have worked out to around Rs 13.3 per share. But if one added to it the interest cost which the investor would lose, the actual cost of an equity share would work out to between Rs 22-23, assuming an interest cost of 12 per cent per annum.
Thus the conversion of the non-convertible portion hardly provided any gain to the investors which they would not have realized in case they opted to hold onto the non-convertible portion to maturity. And thus many investors chose not to convert.
The significance of this option becomes clear in the light of the fact that if all TOCD holders did not opt for the fourth option then equity shares to the extent of the unconverted portion of TOCDs (i.e. three equity shares per NCD) would have been offered to the promoter (RIL) on the same terms as that to the TOCD holders i.e., 3 shares for Rs 40.
In other financial transactions (unrelated to the TOCDs as discussed above), the promoter (RIL) directly, RIL associates and RIIHL subscribed to huge convertible debenture issues of RPL which later helped them to together acquire a majority equity stake in the finally fully diluted shareholding of RPL at terms that were favourable to them (RIL, RIL associates, RIIHL)
As a result of the various measures adopted to finance RPL from the time of its inception till just before the merger, the share holding structure of RPL stood as indicated in the table below:
Pre-Merger and Post Merger Shareholding
Reasons for Merger
The merger takes into consideration factors such as:
The continued progress in hydrocarbon sector reforms and deregulation in India
The dismantling of the Administered Pricing Mechanism (APM) in the refining and marketing industry
The government's decision to grant marketing rights for transportation fuels to the private sector, including to RPL
The new growth opportunities of substantial scale arising from the proposed privatisation of domestic public sector oil companies
Financial Benefits:
RPL has achieved several corporate records in the initial nearly two years of its operations.
RPL is India's largest private sector company in terms of sales, and second only to RIL in terms of profit, net worth and assets. RPL has reported cash profit of Rs. 1,877 crore (US$ 389 million) and net profit of Rs. 1,269 crore (US$ 263 million) for the 9 months period April-December 2001.
The proposed merger will thus directly result in:
accretion of over Rs. 1,300 crore (US$ 265 million) to RIL's net profits, and
acquisition of facilities, which have been valued at over Rs. 21,000 crore (US$ 4.3 billion) by leading international industry consultants, Chemsystems
The merger will be significantly accretive for RIL's shareholders, as annualised EPS will increase from Rs. 26.0 (US$ 0.5) to Rs. 28.8 (US$ 0.6) per share, based on financial results as announced by RIL and RPL for the first 9 months of the financial year 2001-02, as annualised.
RPL, on a standalone basis, enjoys credit rating of AA+ from CRISIL. Its rating was upgraded from BBB+ to AA+ within just about a year.
The RPL refinery has operated at 107% capacity utilisation rate during the financial year ended March 31, 2002.
In recognition of the benefits of the proposed merger, the credit rating agencies, CRISIL and FITCH have reaffirmed outstanding AAA and P1+ credit ratings for RIL, and placed RPL's existing AA+ credit rating on rating watch, with positive implications.
Operational Benefits:
The merger will contribute to the following substantial benefits for RIL, thereby enhancing shareholder value:
Scale
Integration
Global competitiveness
Operational synergies
Logistics advantages
Cost efficiencies
Productivity gains
Rationalisation of business processes
Optimisation of fiscal incentives
Enhanced financial strength and flexibility
Elimination of transfer pricing issues
Reduction of volatility in the earnings stream
The merger of RPL with RIL will thus contribute to achievement of RIL's objectives of attaining leadership in the industry peer group, not only in terms of the assets base, revenues, production volumes and market share, but also in terms of maximisation of total shareholder returns.
Sources:
RPL-RIL merger: Excellent synergies, smart timing? The Hindu Business line, March 02, 2002
RIL-RPL merger: Big boys play it right. Outlook Money Magazine, March 14, 2002
RIL, www.capitaline.com
RIL-RPL Merger: The Inside Story, Business Today, March 31, 2002
