Monday, July 5, 2010

RNRL-RPower merger at 4:1 swap

Reliance Anil Dhirubhai Ambani Group (R-ADAG) company Reliance Natural Resources (RNRL) will merge with Reliance Power (RPower), another group firm, in a 4-for-1 share swap deal. After the merger, shareholder of RNRL will get one share of RPower for every four shares of RNRL held on the record date, the R-ADAG announced on Sunday after the board meetings.

As of Friday’s close of trading, RNRL was valued at nearly Rs 10,400 crore, while RPower's market capitalisation was almost Rs 42,000 crore, so jointly the combined market capitalisation is worth over Rs 50,000 crore. A statement from the R-ADA group said that the valuations were done by consulting major KPMG. The merger is subject to approvals from the shareholders of the two companies and also other regulatory nods. The completion of the merger could take about six months.

Post the transaction, RPower will have over 60 lakh shareholders, the largest number of shareholders for any firm, a company official, told TOI. According to the official, who did not wish to be identified, shareholders of both companies would benefit. "While RNRL would become part of a larger company, RPower would get the benefits of the gas supply agreement entered between RIL and RNRL," he said. On Friday, the two companies had informed the bourses that the boards of the two companies will consider the proposal for merger.

Given the share-swap ratio, market players expect RNRL's scrip price to slide when trading resumes on Monday, while RPower shares could trade flat. On Friday, RPower stock on the BSE closed at Rs 175, up 3.3% over Thursday's close, while RNRL, after an initial spurt, had finished the session at Rs 64, down 2%.

According to market players, the merger was necessitated by a recent Supreme Court verdict, which said that RNRL could not trade in gas received from RIL, and virtually turned the company into a shell company that will only act as a pass through vehicle for RPower.

RNRL is the company which is mandated to supply gas to RPower that will run the latter's electricity generation plants. Analysts feel that post merger, the combined entity will enjoy economies of scale since the supply of gas and also its usage will be controlled by one company. In effect, the marketing margins will also remain within RPower now.

In May, other than disallowing RNRL from trading in gas obtained from RIL, the apex court had also said that the gas it buys from RIL should be priced as per the government policy and not according to the private family agreement that the two Ambani brothers — Mukesh and Anil — had signed when they split their family businesses in 2005. Subsequent to the Supreme Court order on gas supply, the two brothers had prematurely ended the no-compete agreement that they had signed in 2005.

The no-compete agreement had clearly defined the businesses each could and also could not enter. R-ADAG has been able to restructure its group companies and in some cases would be able to infuse much-needed capital, like in the case of Reliance Communications (RCOM), due to the cancellation of the non-compete agreement.

RCOM had last week raised some money by demerging its towers business and merging it with GTL Infra. RCOM since then also bought out Mumbai-based Digicable.

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