India's Reliance Industries to absorb subsidiary

MUMBAI, India - India's Reliance Industries Ltd. will absorb its Reliance Petroleum subsidiary through a share swap, consolidating its control of the world's largest refinery complex, the companies said Monday after both boards approved the merger.

"It is a significant step in our goal to be among the largest global corporations," Reliance Industries Chairman Mukesh Ambani said in a statement.

Reliance Petroleum operates a 580,000 barrel-a-day refinery at Jamnagar, in the northwestern state of Gujarat, which is adjacent to a 660,000 barrel-a-day refinery run by Reliance Industries. The merger brings both refineries under the control of Reliance Industries, creating what the company says is the world's largest refinery complex.

Reliance Petroleum shareholders will receive one share of Reliance Industries for every 16 shares of Reliance Petroleum they hold. Reliance Industries will issue 69.2 million new equity shares, diluting its equity base by 4.4 percent.

Reliance will also buy back Chevron's 5 percent stake in Reliance Petroleum for 60 rupees a share, Alok Agarwal, Reliance Industries' chief financial officer, told reporters Monday. The investment agreement has been terminated by "mutual consent," though Reliance will continue to buy crude from Chevron, he added.

In 2006, Chevron India Holdings Pte. Ltd. Singapore, a wholly owned subsidiary of Chevron Corp., spent about $300 million for a 5 percent stake in Reliance Petroleum. It had to decide this year whether to up its stake to 29 percent or exit the project.

Chevron bowed out because of the "global downturn in demand for refined products," John Digby, president of Chevron Petroleum India Pvt Ltd., said by e-mail Monday from New Delhi.

"Chevron has other attractive investment alternatives," he added. "We have to optimize our capital expenditure from a truly global perspective."

The rupee has fallen 13 percent against the dollar since Chevron made its investment. Though Reliance is buying back Chevron's shares at the initial purchase price, Chevron's stake is worth only about $260 million in today's dollar terms.

Digby declined to comment on the details of the transaction.

Agarwal said he was confident that Reliance would maintain profits even as global demand for petroleum products softens because complex refining like that done at Jamnagar has higher margins, and the two refineries will focus on growing markets, like producing ultra-clean fuels for export to Europe.

"Jamnagar becomes the refining capital of the world. Who would have thought that 10 to 12 years ago?" Agarwal said.

Analysts said the merger will allow Reliance, which previously owned 70 percent of Reliance Petroleum, to consolidate cash flows at a time when borrowing is becoming increasingly expensive on global markets.

"The company is trying to benefit from consolidated cash flow," said Deepak Pareek, an analyst at Mumbai's Angel Broking. "They won't have to borrow from the market. The result is a better cost of capital."

The Reliance Petroleum refinery started operations on Dec. 25 and shipped its first product in January. When the refinery is fully operational it will generate free cash flow of $1.5 billion to $2 billion a year, Pareek said.

Over the last four years, Reliance Industries has spent close to $20 billion on investments, a large part of which has been funded through debt, according to a Monday report from Indian ratings agency CRISIL, a Standard & Poor's affiliate.

CRISIL reaffirmed its AAA ratings on Reliance Industries debt Monday, saying it "believes that the consolidated balance sheet will become progressively stronger, as the cash accruals from the expanded refining capacity, and from gas sales, are used to lower debt and gearing levels."

Niraj Mansingka, an oil and gas analyst at Mumbai's Edelweiss Capital Ltd., said Reliance's two coastal refineries get most of their crude by ship from the Middle East, as well as from Venezuela and Iran.

They export most of their refined petroleum to Asia and Europe, he said.

Mansingka said he sees little shareholder value in the merger, aside from some minor tax benefits, and believes the swap was triggered by Chevron's decision to pull out.

"Once Chevron exited the venture, there's no reason for Reliance to have the two companies separate," he said.

Shares in Reliance Industries fell 3.15 percent to close at 1,225.15 rupees, while shares of Reliance Petroleum closed down 1.38 percent, at 75.15 rupees, on the Bombay Stock Exchange.

The benchmark Sensex index fell 3.2 percent to 8,607.08.

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