RIL, RPL merger: A comprehensive CNBC-TV18 analysis

Reliance Petroleum shareholders will get one Reliance share for every 16 shares held. Also, Reliance Industries will extinguish its treasury stock.

Here is a verbatim transcript of Sajeet Manghat's comments on CNBC-TV18. Also watch the accompanying video.

The ratio is 16 shares of RPL for only one share of RIL and that means a dilution of 4.4 per cent of fully diluted RIL equity. Treasury stock created as a result of this merger will be extinguished, so that's the positive for Reliance. While the ratio is marginally in favour of RPL share holders, the extinguishing of treasury stock is a positive for RIL share holders. So, the event would be neutral because going forward, there will not be an overhang of treasury stock coming in RIL. 

From the point of view of earnings potential synergies, the management was talking about synergies in terms of sourcing and marketing of products in key markets like Europe and the US. 

Will the merger be EPS accretive?
Mukesh Ambani said the merged entity would be an EPS accretive merger. The reason they said this is, the equity dilution was only 4.4 per cent of RILs expanded equity and they expect RPL to contribute more than that and that would mean that it would be accretive to the RIL share holders and RIL equity from that perspective. 

Tax benefit:
On Tax issues, the management made it very clear that the merger was going to be tax neutral and both the entities would enjoy continue with the same tax benefit they are currently enjoying. They won't be any benefits which will spill out to the other entity. 

RPL will continue to get SEZ benefits, while RIL will continue to get EoU benefits and on a consolidated basis there wont be about much of an impact. 

The merged entity would be an operational synergy at a scale at which they would be able to use. There wont be any gains or losses caused by taxes and they were very particular on that. 

What next:
The product which will come out of RPL would be ultra clean fuel which will be sold in markets like Europe and the US and both these markets are facing a severe downturn in terms of demand coming in.

RIL believes, over the next 12-18 months they will see demand coming down by nearly a million tonnes per day. Currently, the demand in these markets is about 80 million tonnes and now it will come down by another million tonnes per day over the next 12-18 months. The cost efficiency of refineries will come into play and they will be able to sell the product much earlier because the existing refinery will not be able to use the cost efficiency but they have a high cost structure and that would be the key point going forward. 

Why did they do the IPO and why are they merging this at this time? 
The refinery is 28 million tonne per annum, it had a Cap Ex of nearly USD 6.5 billion, so putting this burden on RIL's balance sheet would have been too much to ask for because RIL was going into excessive Cap Ex on retail or SEZ and also in oil and gas exploration, so asking for USD 6.5 billion would have been tougher at that point in time. The issue of timing was one of the key questions in the press conference and now since the execution risk is over and its upto the operation, the entire merger will allow operational synergies.  

Since these refineries are adjacent to each other so they wanted to bring the operational aspect of it together so hence this is one of the reasons for merger of RIL-RPL..