The Mukesh Ambani-controlled companies, Reliance Industries Ltd (RIL) and Reliance Petroleum Ltd, were today merged into one entity, as anticipated. The boards have decided the swap ratio at 1:16, which means that RPL shareholders will get one RIL share for every 16 shares held in RPL. Reliance Industries has also decided to extinguish its treasury stock.
The merger will be effective from 1 April this year. The ratio is considered to be slightly in favour of RPL.
Commenting on the amalgamation, Reliance Industries chairman and managing director Ambani said, "The merger follows our enduring philosophy of creating shareholder value." He added the merger will be EPS accretive and that RIL will issue 6.92 crore shares to RPL shareholders.
The merger will give the benefit of combined operating profitability to the company, though tax benefits through depreciation would be minimal as the two units will maintain independent accounts.
The new entity, which will be the world's largest refining capacity at a single location and the fifth largest polypropelene manufacturer, will be better able to raise large funds, say industry experts.
Alok Agarwal, chief financial officer of RIL, speaking at a press conference, said the merger will unlock synergies in crude sourcing and product placement. He said the amalgamation will mitigate holding company discount.
''Since the two firms will continue to function as separate entities as far as their accounts are concerned, the two companies will have their independent tax benefits. This merger is not about tax benefits,'' he added.
Agarwal said the merger would also lead to greater flexibility in operations planning as integrated energy companies have higher valuations as against standalone refiners. Agarwal said gas assets and earnings potential will exceed 4.4 per cent equity dilution. Promoter holding in RIL, he said, will come down to 47 per cent from 49 per cent.
The merged company, Agarwal said, will be able to use cash flow in a better manner. He said the company sees significant cash flow from RPL in the first year of operations.
Both RIL and RPL have adjacent refineries at Jamnagar in Gujarat. Reliance Industries has a 660,000-barrels-a-day capacity, Reliance Petroleum's capacity is 580,000 barrels a day.
The merger will enable efficient sourcing of crude from anywhere in the world and give greater flexibility in operational planning, said Agarwal.
Earlier, the RIL board had approved a scheme of amalgamation of Reliance Petroleum with the company under provisions of Sections 391 to 394 of the Companies Act of 1956. ''The merger follows Reliance Industries' philosophy of creating enduring value for all our stakeholders,'' chairman Mukesh Ambani said after the board approval. ''It is a significant step in our goal to be among the largest global corporations.''
The market did not seem too enthused by the news, as Reliance shares dipped slightly on the stock exchanges.