The Hindu Business Line : RIL shareholders to gain

THE merger ratio of one share in Reliance Industries for 11 shares in Reliance Petroleum appears to be skewed in favour of Reliance Industries' shareholders.

There is no doubt that they stand to gain tremendously as they will be acquiring a state-of-the-art refinery with a large capacity for a mere 32 per cent rise in equity capital.

Cash flows are traditionally strong for oil companies and Reliance Industries, operating in a commodity industry, would stand to benefit from Reliance Petroleum's strong cash flows.

By pegging the exchange ratio at 11 shares, the extent of dilution in Reliance Industries' equity has been contained.

Besides, 28 per cent of Reliance Petroleum's equity held by Reliance Industries will now be extinguished, while 7.5 per cent held by Reliance Industrial Investments and Holdings, a 100 per cent subsidiary of Reliance Industries, will now be transferred to a trustee.

It is significant that the merger will be effective from April 1, 2001.

This would help the merged Reliance Industries to leverage the strengths of the combined balance sheet in the next two months when it would be out.

The time of merger is important considering the extent of resources that may have to be raised by Reliance Industries in the coming fiscal.

It has already bid for Indian Petrochemicals Corporation (IPCL) and will, in all probability, bid for Bharat Petroleum and Hindustan Petroleum as well, when they are thrown open for bidding.

Assuming it succeeds in IPCL and in one of the other two, Reliance may have to generate at least Rs 4,000 crore in the next six months.

Besides, there is the infocom venture in which Reliance Industries holds 45 per cent stake, which will require constant funds infusion in the next couple of years.

This is where the healthy cash flows from Reliance Petroleum may come in handy. Besides, the combined reserves and equity may also help in any borrowings that may become necessary.

The Reliance Industries stock may be in for an uptrend in the near term on the back of the favourable exchange ratio.

Reliance Petroleum shareholders may have to wait till the merger process is complete to see any gains in their holdings.

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RIL shareholders to gain