RIL-IPCL merger to create global petrochem major

The much anticipated and talked about merger is all set to happen when the Reliance Industries board considers the merger of IPCL with itself on March 10. While the IPCL merger will give a big boost to the RIL balance sheet, all eyes are now fixed on the swap ratio for the merger, reports CNBC-TV18.

The proposed Reliance - IPCL merger will add a lot of weight to the Reliance balance sheet. IPCL's FY07 net profit is likely to be close to Rs1,000 crore and it has a cash balance of around Rs1,100 crore. The combined net worth of the merged entity will be over Rs50,000 crore and the balance sheet size will be a whopping Rs78,000 crore.

But it is the swap ratio that will receive close scrutiny. Valuation experts say, a swap ratio is usually decided by taking the average of three methods - earnings value, market price and net asset value. The first two have equal weightage while the net asset value is given lesser weight for calculating the swap ratio. Going by just market price the swap ratio would work out to about 5.5:1; that for every 5.5 shares of IPCL, a shareholder gets 1 share of Reliance.

Going by that merger ratio, Reliance will have issue around 5.5 crore shares to IPCL shareholders, almost half of which will go to Reliance Industries and its promoters for the 47-per cent stake they hold in IPCL.

The question is will the RIL board cancel those shares or follow the RPL model and hold them in a trust? If it decides to cancel those shares, the promoter group's stake in RIL could test the 50-per cent mark.

If it does not, the promoter group's stake in RIL, which currently owns 50.84 per cent, will come down to 49 per cent after the merger. And, post merger and post issue of preference warrants to the promoters, it will go up to about 53 per cent.

RIL acquired a 26-per cent stake in IPCL in 2002 at Rs231 a share when the NDA government divested its stake. Coincidentally, the IPCL stock price closed on Wednesday at exactly the same price.

IPCL operates three petrochemical complexes, a naphtha-based complex at Vadodara and gas- based complex each at Nagothane near Mumbai and at Dahej. Together, IPCL and Reliance will create one of the world's largest petrochem companies.