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Monday, March 2, 2009

RIL & RPL Merger



MERGER:

The board of directors of Reliance Industries and Reliance Petroleum on Monday approved the merger of the two firms, creating one of the world's largest petrochemical entity and offered the shareholders of RPL one RIL share for every 16 shares held by them. Shares of Reliance Industries opened down 1.24%, then dipped further to touch an intra-day low of Rs 1,213.20, a fall of 4.09% from its last closing price. Meanwhile, shares of RPL opened up 7.61% on the BSE, and touched its intra-day high of Rs 82 after the board approved the scheme of amalgamation.


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.

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