Ambanis of Reliance have adopted this modus operandi without fail the past 25 years…They create new companies for similar business…and when they commence production,they amalgamate them into the Parent, RIL…in a sense give birth to Children and bring them back into the Parent fold
So I was not surprised at all when the Breaking News hit that the Boards of RIL and RPL are meeting seperately on March 2,2009 to consider and recommend the amalgamation of RPL into RIL…In fact for years I have been stating that this will inevitably happen…What must have pushed RIL now is that the Margins are under pressure in both, RIL and RPL, and RIL is carrying Huge Inventory losses as it had entered into Oil Contracts at US $ 120+ per barrel in mid 2008…Oil is now crashed to just over US $ 40 per barrel…Clearly RIL sees Cashflow,Tax,Valuation,Scale and Leverage Synergies in this Amalgamation
This Breaking News will Break RPL Shareholders…Closing Prices,adjusting for a possible fall in the price of RPL on Opening on Monday and adjusted Book Values indicate an amalgamation ratio of 1: 20
RPL Shareholders will not get to see really how much RPL really makes on the bottomline in it’s first full year of production !….This is the devious part really……Falling Gross Refining Margins would have meant a very low bottomline for RPL….With Equity at Rs 4500 crs +,it would have been seen as a loss of Group image in not being able to service the equity
The April 2006 IPO of RPL was at Rs 60…That’s where the price will settle…It may sink even lower…Current Price is Rs 76 while RIL closed at Rs 1265
As a stand alone Refinery,RPL would have got Earnings Valuation Multiples of much below 10….and much below Overseas Peers….FY 2010 would have shown Earnings in the low range of Rs 2 to Rs 4…despite a low floating stock of under 10%,the share price would have reacted quite sharply…With the amalgamation this scenario will not play out
Long Term RPL Shareholders have been short circuited…Just think about this !…in April 2006,you invested in RPL at Rs 60…assuming the ratio is 1:20,your cost of the RIl Share would work out to Rs 1200 right now…in April 2006,RIL was Rs 825-850 at the time of the RPL IPO
So,in April 2006 if you had invested in RIL, and were yet holding the shares you would have made 50% + gains…Twice that you would have made by investing in the RPL IPO at Rs 60 and yet held the share
Also recollect that in November 2007 RIL sold 4.01% RPL Stake for Rs 4023 crs…That’s 18 cr shares at an average of over Rs 220….There is a complaint pending with SEBI for Insider Trading by RIL just before this sell off…It transpires that Ten companies associated with RIL’s and sharing a common address sold 10.54 cr RPL shares in the Futures in November 2007 at prices of Rs 230 to Rs 290 just prior to RIL beginning to sell off a 4.01 % stake in RPL…These Ten Companies pocketed a cool Rs 1000 crs profit inside November 2007 itself by squaring up the shorts as RPL fell to Rs 160 after RIL sold this 4.01% stake…Search my blog for this suspected Insider Trading
WHAT IS NOT RIGHT IS JUST NOT RIGHT ! PERIOD !
Another thing…RIL will own 75.4% of RPL after it buys out Chevron’s 5% stake….In the amalgamation this stake may be cancelled out or shown as Treasury Stock…If cancelled,then the addition in RIL Equity will barely be Rs 56 crs assuming a 1: 20 amalgamation ratio …Even otherwise it will yet be small at Rs 225 crs….RPL’s bottomline will add significant incremental EPS to RIL after the amalgamation enabling maintaining/enhancing Valuation and therefore Share Price in these Critical Times …Any RPL Loss would serve to setoff Profits of RIL and gain a Tax advantage
However under Consolidation Accounts, RPL Accounts have to be consolidated with RIL anyway…so some of the benefits would actually be already accruing anyway…Would these multiply manifold on the amalgamation ? Or is this Amalgamation purely just to save face by not having to show RPL Accounts as a Stand Alone Entity in FY 10 as the performance is expected to be weak and this could cause havoc in the RPL Share Price !
So how should Shareholders of RIL and RPL act now to protect Value after announcement of this Amalgamation ?
Prima facie this Amalgamation will benefit RIL more than RPL…Let’s await March 2,2009 and see what terms of the proposed amalgamation are announced….Two Stakeholders…The Government and RPL Shareholders see to be losing Value.
But an immediate intuition tells me to sell RPL immediately…atleast buy a Protected Put