The Reliance Industries Board has approved the merger of IPCL with itself on Saturday. The swap ratio has come in as one share of Reliance Industries for every five shares of IPCL.
Commenting on the merger, Sanjeev Agarwal of E&Y says that operation synergies and tax saving are the key drivers for the merger as petrochemical margins come under pressure.
CNBC-TV18 shares with domain-b Agarwal's analysis:
The swap ratio seems to be very much in line with the current market price; was that a big consideration or did even a fundamental valuation metric throw up 5:1?
It's a mix of various parameters; market price was definitely one of the considerations. For merger purposes, both companies' valuations have to be based on fair valuation and fair valuation will typically demand to use multiple methods, not just one method.
For mergers, typically we could use market price method, earnings method and net asset value method. Typically, more weightage is given to earnings and market price method than the asset value method. In the current case, we used all these three methods and the valuation was based on it.
A lot of IPCL shareholders would probably contend that their stock has underperformed Reliance by quite a margin. Therefore, a fair valuation method should have seen a ratio much more in their favour than Reliance's. How would you look at such a contention?
My contention is that Reliance Industries has performed well and they have been continuously getting into new businesses, growing better. IPCL has performed well in their financial numbers but they have not entered into any other business and it's a cyclical business at the end of the day.
A lot of people believe that petrochemical business will suffer margin pressure going forward because of the additional capacity coming up in the region, whereas RIL is continuously getting into newer business, it's a more diversified business model.
Therefore, RIL should get better valuations. Even historically, if you look at IPCL for the last four years, it has not performed at all whereas RIL has become almost 10 times if the demerger is included, etc.
What is your view on the petrochemical cycle forecasts and did that weigh in determining the ratio?
As I said, we use multiple methods. So in one of the methods, it is one of the considerations.
Are petrochemical margins going to slip going forward?
It will be under pressure, that's our view.
Did that view come independently from Ernst & Young or was it a view from the Reliance and IPCL management?
It's an independent view based on various research and reports available in the market. As I said, this is not a very significant consideration at the end of the day.
What is your understanding of what the Reliance management wants to do with resultant increase in the treasury stock now?
I guess they are the best ones to answer that. But looking at the media reports, I will assume that some day, they will probably place it with the strategic or financial investors.
They will use that to make a big acquisition, as the media says.
What was the rationale for the merger? In your interactions with both the managements, what came through as the rationale for doing this merger now?
This would have been done probably even earlier; but better late than never. There are huge operation synergies; probably there are tax savings also, as I understand. But RIL and IPCL both have similar capacities in petrochemicals.
So to that extent, there will be significant operation synergies and the RIL balance sheet will also be much stronger. From IPCL's point of view, they will now be part of RIL. Therefore, shareholders will be benefited from RIL's overall dynamism now.
Did you come across any kind of willingness on the part of Reliance to extinguish the treasury stock or the stock that will come to them because of the merger?
I haven't had any discussion with them on this. I doubt whether they will extinguish it. But it doesn't make sense; it doesn't make any difference to investors either. And if they have plans to go big, they can probably use that treasury to raise resources.