Reliance Industries - RPL Merger impact

The Reliance Industries board will meet on Monday to consider the merger of Reliance Petroleum with the mothership, which will catapult the merged entity into the list of the world's top 50 profitable companies. DNA Money looks at what it means:
18:1 SWAP RATIO?

Historically every company that Reliance Industries Ltd has floated has been folded into the mothership at some stage. This way, the promoters have always been able to increase their stake in the mothership.

The merger ratio, therefore, is more likely to favour RIL than RPL. Again, speaking of history, RIL has set the swap ratios for earlier mergers at a CAGR of 8-10% from IPO price. RPL's IPO (in April 2006) was priced at Rs 60. The RPL share price on Friday was Rs 76 (exactly at 8% CAGR). A 10% CAGR would mean a share price of Rs 80. Given this, the swap should at best be around 18:1, said Kunal Bhakta, director, Foster Capital Ventures.

THIN ARBITRAGE FOR TRADERS
Basically, whenever a merger is announced and the swap ratio becomes public, the shares of the company that will cease to exist typically trades at a discount to the implied swap ratio. The arbitrage opportunity in the extinguishing company's share depends on liquidity.

"On Monday morning , initially both stocks will react positively in the region of 2-4% because there will always be two schools of thought in terms of which company will benefit more," said Bhakta. He expects discount (arbitrage window) will be around 2.5% to 3%. "Even if it touches 4%, it will come back to those levels converging with time, tangoing the process or sequence of merger," Bhatka said.

MERGER BY APRIL END
The first step for RIL will be to seek legal sanction for the merger. The high court will hear the application in a week at the earliest. The court is then expected to ask RIL to get approval from shareholder. A notice for an extraordinary general meeting will have to be sent 21 days before it is held as per Companies' Act. So net-net, the merger could be consummated legally by April-end, said analysts.

EARNINGS & REFINING CYCLE
RPL's cash flows are seen helping RIL's capital expenditure plans because RPL is more efficiently structured in terms of cash flows, analysts said. However, while the deal would bring much-needed liquidity in the short term, it also makes RIL less attractive to those who do not want to invest in a cyclical, commoditised business.

RIL already earns two-thirds of its revenues from refining, an industry that is facing a multi-year cyclical downturn. This merger would double RIL's refining capacity, thereby making its non-refining revenues negligible.

This will tie RIL's fortunes more closely to the refining cycle, which is globally entering a stage of depression. On the positive side, there will be a huge contribution to RIL's bottomline from sale of Krishna Godavari gas. The company, which pays only a 11% minimum alternate tax, can now use the depreciation from RPL plant to lower the profit of the combined entity and save on tax.

SEZ & TAX HOLIDAYS
The merger is unlikely to have any impact on the tax holidays enjoyed by RPL, since they are bestowed upon the refining unit operating inside the special economic zone, rather than on RPL as a company. The tax benefits are expected to continue without any change. However, it will have an indirect beneficial impact due to the transfer of depreciation of RPL's plants to RIL's profit & loss accounts.

via DNA