Merger between RIL and RPL:Oops… I did it again!

ET Intelligence Group’s Ramkrishna Kashelkar finds out how investors can benefit from the much talked about merger between RIL and RPL

THE boards of Reliance Industries (RIL) and Reliance Petroleum (RPL) will be meeting on March 2 to consider amalgamation of both the companies. This will be yet another instance when RIL, the biggest private refiner in the country, would merge its refining subsidiary with itself.
There are several alternatives of carrying out the merger, the clarity on which will emerge only later. If it’s an allcash deal, and RIL comes out with an open offer for RPL, it will have to pay out over Rs 10,000 crore for the outstanding RPL shares.
Alternatively, RIL could issue its shares in the exchange for RPL shares. The swap ratio could work out to somewhere between 1:15 and 1:17, based on the valuation methodology. Comparing the current market capitalisations, one RIL share is worth 16.6 RPL shares, whereas comparing the latest available balance sheet, the book value of one RIL share is 14.8 times that of RPL share.
At an assumed swap ratio of 1:15, RIL will have to issue 8.89 crore equity shares against the outstanding 133.3 crore RPL shares. As a result, RIL’s equity will rise to Rs 1,662.65 crore, which amounts to a dilution of just 5.6%.
The new refinery is expected to bring in additional revenues of Rs 100,000 crore and net profit of Rs 8,500 crore, annually, which is over half of RIL’s net profit for the 12 months ended December 2008. Hence, there is no doubt that the merger will be EPS accretive for RIL shareholders.
What RPL shareholders should do now is a key question. If they choose to convert their shareholding to RIL immediately, they will get a swap ratio of around 1:17. However, it is likely that the company will fix the swap ratio based on the book value at 1:15 or so. Hence, RPL shareholders should wait for more clarity on the swap ratio. However, if the equation between RIL and RPL shares moves above 1:15 in the stock market, they would do better by switching.