Key RIL-IPCL merger drivers-Op synergies, tax saves: E&Y

14 March 2007

The Reliance Industries Board has approved the merger of IPCL with itself on Saturday. The swap ratio has come in as one share of Reliance Industries for every five shares of IPCL.

Commenting on the merger, Sanjeev Agarwal of E&Y says that operation synergies and tax saving are the key drivers for the merger as petrochemical margins come under pressure.

CNBC-TV18 shares with domain-b Agarwal's analysis:

The swap ratio seems to be very much in line with the current market price; was that a big consideration or did even a fundamental valuation metric throw up 5:1?
It's a mix of various parameters; market price was definitely one of the considerations. For merger purposes, both companies' valuations have to be based on fair valuation and fair valuation will typically demand to use multiple methods, not just one method.

For mergers, typically we could use market price method, earnings method and net asset value method. Typically, more weightage is given to earnings and market price method than the asset value method. In the current case, we used all these three methods and the valuation was based on it.

A lot of IPCL shareholders would probably contend that their stock has underperformed Reliance by quite a margin. Therefore, a fair valuation method should have seen a ratio much more in their favour than Reliance's. How would you look at such a contention?
My contention is that Reliance Industries has performed well and they have been continuously getting into new businesses, growing better. IPCL has performed well in their financial numbers but they have not entered into any other business and it's a cyclical business at the end of the day.