Reliance and the LyondellBasell deal: Catapulting Reliance as a top ranking petrochemical giant

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Reliance and the LyondellBasell deal: Catapulting Reliance as a top ranking petrochemical giant

Posted On : Feb-03-2010 | seen (561) times | Article Word Count : 1254 |

The article uncovers the details behind the all-cash non-binding bid that Reliance made to buy a controlling stake in the sinking petrochemical giant LyondellBasell. Reliance liquidated a considerable number of treasury stock to support this bid.

The largest single investment by a company from an emerging market into an advanced economy is how the Reliance bid for LyondellBasell can be described. The acquisition attempt is being compared to that of Tata Steel’s take over of the Corus Group. The non-binding cash bid has been subject to a host of market speculations and holds the potential of catapulting Reliance to be one of the world’s largest conglomerates. It would place Reliance in the league of the top petrochemical makers in the world like Saudi Arabia’s SABIC, Germany’s BASF and U.S. based Dow Chemical Co. The deal also has the potential to make Reliance Industries rub shoulders with petrochemical giants like Exxon Mobil and Chevron.

On the 21st of November, 2009, Reliance Industries Limited submitted an all-cash non-binding bid to buy a controlling stake in LyondellBasell. The bid came after LyondellBasell, the third largest petrochemical company in the world, filed for bankruptcy in January, 2009. The deal, if consummated, would facilitate growth of Reliance’s core business. As LyondellBasell has large petrochemical capacities coupled with a good tech portfolio as well as joint ventures in the Middle East, it would help Reliance Industries grow and reach the Western markets, as so far Reliance’s petrochemical business has only been India centric.

The initial bid for the petrochemical company was speculated to be in the range of $6 billion and $12 billion. LyondellBasell is essentially a unit of the New York based Access Industries Holdings Llc and was founded by billionaire Len Blavatnik. The petrochemical company was formed in December 2007 after Basell AF paid $12.7 billion for Lyondell Chemical Co. The maker of plastics like polypropylene and polyethylene declared bankruptcy after only thirteen months of its establishment. The crude oil refinery and other operations of the firm are based in Houston. The petrochemical company filed a petition in the US Bankruptcy Court in Manhattan. According to the petition, LyondellBasell had assets worth $27.1 billion, along with a debt of more than $19.4 billion as well as more than 25,000 creditors. Lyondell Chemical and its other US affiliates, filed for bankruptcy in January.

LyondellBasell was the largest producer of polypropylene and polyester and had around 61 manufacturing units which were spread over 19 countries including the US, France, Mexico and Thailand. LyondellBasell plunged into bankruptcy due to a huge debt of more than $22 billion which ensued as a result of global recession pushing down the prices of petrochemicals. The second reason for bankruptcy was a conflict of interest amongst the lenders to LyondellBasell. The preliminary bid for acquisition by Reliance was an alternative to LyondellBasell’s previous reorganization plans which it had filed in the September of 2009 with the New York bankruptcy court. While Merrill Lynch Bank of America was said to be playing the role of an advisor to Reliance, Citigroup was believed to be the acting advisor for LyondellBasell.

According to analysts of leading global investment banks, the deal would not only be a value accretive for Reliance, but also a smart investment move as valuations were still low following the global economic slump caused by recession. Analysts also stated that this bid was different from previous bids for overseas acquisition by India due to the size of the companies involved, the leverage created by the balance sheet, the acquiree being in a state of bankruptcy and the recovery of the global economy.

Crisil stated that if Reliance was successful in making the acquisition deal, it would make India’s largest conglomerate, one of the largest integrated chemical companies in the world. The deal would also give Reliance Industries the edge of a well-balanced portfolio which would include petrochemicals, refining and upstream exploration and production. Since Reliance is presently ranked fourth in Asia on the basis of its assets, return on capital employed and profits among other financial parameters. Reliance is only behind three Chinese firms, and the deal would help the petrochemical giant become a mammoth operation along with pushing it up a few notches on the energy rankings. Analysts also speculate that this was a good time to buy companies as those who would wait for the economy to recover would have to bid for more expensive assets.

Crisil also stated in the month of November, that Reliance would fund the deal for acquisition by selling its treasury stock and pulling out its cash reserves instead of taking on additional debt on its balance sheet. Crisil also reaffirmed a “stable” rating for Reliance’s debt. Reliance also informed Crisil that if the deal went through, LyondellBasell would have a conservative capital structure, with a gross debt-to-equity ratio not exceeding 0.75 times. Crisil also added that Reliance’s cash level would be replenished soon as the accruals still remained strong. Crisil went on to state that Reliance’ rating outlook would be revised to a negative if Reliance were to extend any financial support to LyondellBasell. The same would also be applicable if Reliance’s debt levels increased either due to a change in the value of the acquisition or any changes in the financing plan. The deal would also enhance Reliance’s topline to around $80 billion, which would be even bigger than that of industry leaders such as Dow Chemicals.

In the month of December, 2009 Reliance Industries cleared the air on the bid in a statement, when it stated that it had no intentions of buying any of the debt from LyondellBasell Industries. The month of January, 2010 was witness to Mukesh Ambani -led Reliance Industries stepping up its offer for the acquisition by offering $13.5 billion instead of the earlier $12 billion. Reliance also proposed to purchase about $2.25 billion in stock and support a separate $2.8 billion stock offering to pull LyondellBasell out of bankruptcy. The sale of treasury shares by Reliance Industries in the month of September, 2009 was speculated to be an attempt by Reliance to gather funds for the acquisition of the Luxembourg-based company.

Reliance Industries raised about $655 million by selling 15 million shares in treasury stock at Rs 2,125 each in September, 2009. The sale of treasury stock from the Petroleum Trust with Reliance Industrial Investments and Holdings which is a wholly-owned subsidiary of Reliance Group, caused a stir in the markets. However, the speculations were put to rest once Reliance made the non-binding bid. While the original sale was to be of 10 million shares, it was later increased to 15 million. The sale was officially handled by the Citigroup and Bank of America Merrill Lynch. The Petroleum Trust was formed after Reliance decided to monetize the shares that it got out of the share swap merger with Reliance Petroleum in 2002 instead of extinguishing them. The Petroleum Trust held 10.47 crore of Reliance Industries’ shares, or 6.65% of its capital.

The two-tranched deal by Reliance was completed with a further sale of 33 million treasury shares in block deals on the NSE in January, 2010. Reliance sold 28.9 million shares at Rs.1089 per share and the remaining 4.1 million shares at Rs.1057 per share to raise a total of Rs.3500 crore. UBS was the sole manager of the sale. The sale of the treasury stock in January was concluded with a 5% discount at Rs.1,035 per share. The two-tiered treasury stock sale within an interval of less than four months was successful in raising funds worth around Rs.5,863 crore. Reliance Industries also sold a part of its treasury stock for Rs.2,675 crore to LIC.

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<h1>Reliance and the LyondellBasell deal: Catapulting Reliance as a top ranking petrochemical giant</h1> Author: <a href='http://www.articleseen.com/profile_Smith Mike .aspx'>Smith Mike </a> The largest single investment by a company from an emerging market into an advanced economy is how the Reliance bid for LyondellBasell can be described. The acquisition attempt is being compared to that of Tata Steel’s take over of the Corus Group. The non-binding cash bid has been subject to a host of market speculations and holds the potential of catapulting Reliance to be one of the world’s largest conglomerates. It would place Reliance in the league of the top petrochemical makers in the world like Saudi Arabia’s SABIC, Germany’s BASF and U.S. based Dow Chemical Co. The deal also has the potential to make Reliance Industries rub shoulders with petrochemical giants like Exxon Mobil and Chevron.

On the 21st of November, 2009, Reliance Industries Limited submitted an all-cash non-binding bid to buy a controlling stake in LyondellBasell. The bid came after LyondellBasell, the third largest petrochemical company in the world, filed for bankruptcy in January, 2009. The deal, if consummated, would facilitate growth of Reliance’s core business. As LyondellBasell has large petrochemical capacities coupled with a good tech portfolio as well as joint ventures in the Middle East, it would help Reliance Industries grow and reach the Western markets, as so far Reliance’s petrochemical business has only been India centric.

The initial bid for the petrochemical company was speculated to be in the range of $6 billion and $12 billion. LyondellBasell is essentially a unit of the New York based Access Industries Holdings Llc and was founded by billionaire Len Blavatnik. The petrochemical company was formed in December 2007 after Basell AF paid $12.7 billion for Lyondell Chemical Co. The maker of plastics like polypropylene and polyethylene declared bankruptcy after only thirteen months of its establishment. The crude oil refinery and other operations of the firm are based in Houston. The petrochemical company filed a petition in the US Bankruptcy Court in Manhattan. According to the petition, LyondellBasell had assets worth $27.1 billion, along with a debt of more than $19.4 billion as well as more than 25,000 creditors. Lyondell Chemical and its other US affiliates, filed for bankruptcy in January.

LyondellBasell was the largest producer of polypropylene and polyester and had around 61 manufacturing units which were spread over 19 countries including the US, France, Mexico and Thailand. LyondellBasell plunged into bankruptcy due to a huge debt of more than $22 billion which ensued as a result of global recession pushing down the prices of petrochemicals. The second reason for bankruptcy was a conflict of interest amongst the lenders to LyondellBasell. The preliminary bid for acquisition by Reliance was an alternative to LyondellBasell’s previous reorganization plans which it had filed in the September of 2009 with the New York bankruptcy court. While Merrill Lynch Bank of America was said to be playing the role of an advisor to Reliance, Citigroup was believed to be the acting advisor for LyondellBasell.

According to analysts of leading global investment banks, the deal would not only be a value accretive for Reliance, but also a smart investment move as valuations were still low following the global economic slump caused by recession. Analysts also stated that this bid was different from previous bids for overseas acquisition by India due to the size of the companies involved, the leverage created by the balance sheet, the acquiree being in a state of bankruptcy and the recovery of the global economy.

Crisil stated that if Reliance was successful in making the acquisition deal, it would make India’s largest conglomerate, one of the largest integrated chemical companies in the world. The deal would also give Reliance Industries the edge of a well-balanced portfolio which would include petrochemicals, refining and upstream exploration and production. Since Reliance is presently ranked fourth in Asia on the basis of its assets, return on capital employed and profits among other financial parameters. Reliance is only behind three Chinese firms, and the deal would help the petrochemical giant become a mammoth operation along with pushing it up a few notches on the energy rankings. Analysts also speculate that this was a good time to buy companies as those who would wait for the economy to recover would have to bid for more expensive assets.

Crisil also stated in the month of November, that Reliance would fund the deal for acquisition by selling its treasury stock and pulling out its cash reserves instead of taking on additional debt on its balance sheet. Crisil also reaffirmed a “stable” rating for Reliance’s debt. Reliance also informed Crisil that if the deal went through, LyondellBasell would have a conservative capital structure, with a gross debt-to-equity ratio not exceeding 0.75 times. Crisil also added that Reliance’s cash level would be replenished soon as the accruals still remained strong. Crisil went on to state that Reliance’ rating outlook would be revised to a negative if Reliance were to extend any financial support to LyondellBasell. The same would also be applicable if Reliance’s debt levels increased either due to a change in the value of the acquisition or any changes in the financing plan. The deal would also enhance Reliance’s topline to around $80 billion, which would be even bigger than that of industry leaders such as Dow Chemicals.

In the month of December, 2009 Reliance Industries cleared the air on the bid in a statement, when it stated that it had no intentions of buying any of the debt from LyondellBasell Industries. The month of January, 2010 was witness to Mukesh Ambani -led Reliance Industries stepping up its offer for the acquisition by offering $13.5 billion instead of the earlier $12 billion. Reliance also proposed to purchase about $2.25 billion in stock and support a separate $2.8 billion stock offering to pull LyondellBasell out of bankruptcy. The sale of treasury shares by Reliance Industries in the month of September, 2009 was speculated to be an attempt by Reliance to gather funds for the acquisition of the Luxembourg-based company.

Reliance Industries raised about $655 million by selling 15 million shares in treasury stock at Rs 2,125 each in September, 2009. The sale of treasury stock from the Petroleum Trust with Reliance Industrial Investments and Holdings which is a wholly-owned subsidiary of Reliance Group, caused a stir in the markets. However, the speculations were put to rest once Reliance made the non-binding bid. While the original sale was to be of 10 million shares, it was later increased to 15 million. The sale was officially handled by the Citigroup and Bank of America Merrill Lynch. The Petroleum Trust was formed after Reliance decided to monetize the shares that it got out of the share swap merger with Reliance Petroleum in 2002 instead of extinguishing them. The Petroleum Trust held 10.47 crore of Reliance Industries’ shares, or 6.65% of its capital.

The two-tranched deal by Reliance was completed with a further sale of 33 million treasury shares in block deals on the NSE in January, 2010. Reliance sold 28.9 million shares at Rs.1089 per share and the remaining 4.1 million shares at Rs.1057 per share to raise a total of Rs.3500 crore. UBS was the sole manager of the sale. The sale of the treasury stock in January was concluded with a 5% discount at Rs.1,035 per share. The two-tiered treasury stock sale within an interval of less than four months was successful in raising funds worth around Rs.5,863 crore. Reliance Industries also sold a part of its treasury stock for Rs.2,675 crore to LIC.About the Author: <a rel="nofollow" href="http://www.reliancepetroleum.com/" Title="RIL">RIL</a> is the flagship company of Reliance Group which is India's largest private sector enterprise, with businesses in the energy and materials value chain. <a rel="nofollow" href="http://www.relclin.com/" Title="Reliance">Reliance</a> Petroleum its major subsidiary is now amalgamated with Reliance Industries Limited. Article Source: <a href='http://www.articleseen.com/Article_Reliance-and-the-LyondellBasell-deal-Catapulting-Reliance-as-a-top-ranking-petrochemical-giant_10122.aspx'> http://www.articleseen.com/Article_Reliance and the LyondellBasell deal: Catapulting Reliance as a top ranking petrochemical giant_10122.aspx</a>

Article Source : http://www.articleseen.com/Article_Reliance and the LyondellBasell deal: Catapulting Reliance as a top ranking petrochemical giant_10122.aspx

Author Resource :
RIL is the flagship company of Reliance Group which is India's largest private sector enterprise, with businesses in the energy and materials value chain. Reliance Petroleum its major subsidiary is now amalgamated with Reliance Industries Limited.

Keywords : Reliance, Reliance Industries, Reliance Group, RIL, Reliance Solar Group, Reliance Industries Ltd, Reliance Industries Limite,

Category : Business : Business

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