roobaroo

India’s most valuable company (by market capitalization) – Mukesh Ambani-controlled Reliance Industries Limited (RIL) has decided to absorb its Reliance Petroleum Limited (RPL) unit through a share swap arrangement.
RIL said it would issue one share for every 16 held in the unit, giving it direct control of the world’s largest refinery complex.
Below is the analysis from top brokerage houses across the country on the deal and who stands to benefit in the scheme of arrangement.
Angel Broking
RIL currently holds 70.4% stake in RPL, which is likely to increase to 75.4% on account of Chevron selling its stake back to RIL.
The merger is likely to strengthen RILs’s cash flow and balance sheet. RPL has incurred huge capex towards commissioning its refinery and is likely to generate positive free cash flow (FCF) going forward.
Thus, the proposed merger would help RIL utilise this Cash flows in its other business verticals in a fruitful manner.
Alternatively, if RPL would have been maintained as a separate entity and had paid dividend to RIL, it would have attracted dividend distribution tax of 17.99%. Thus, the merger allows RIL flexibility in using RPL’s Cash flows.
The proposed merger could benefit RIL in taking advantage of RPL’s depreciation.
While calculating book profit, RIL would be entitled to take SEZ benefit for RPL’s refinery unit and while calculating taxable income for the year, RIL could avail the benefit of depreciation tax shield.
However, things are still unclear whether RIL would actually benefit from the same.
Who benefits from the merger?
The beneficiary of the merger would depend on the swap ratio. In mergers the swap ratio is determined based on the intrinsic value of the respective companies, which is in turn decided based on various parameters, ie. market value based swap ratio, book value based swap ratio, etc.
As per the 27 February 2009 closing price of RIL and RPL, the swap ratio works out to 1 share of RIL for every share 16.6 share of RPL.
However, on book value basis, the ratio works out to be adverse for the RPL shareholders.
We believe given that RPL is yet to commence production from its new refinery the book value based swap ratio would not be an ideal indicator for fixing a swap ratio.
The case also strengthens from the fact that RPL’s IPO price was fixed at Rs60/share much above the book value of Rs29/share of the company. Thus, a book value based swap ratio does not serve any purpose in this case.
We believe swap ratio in the range of 16-17x will be Neutral for both companies. Since RPL’s listing, the hypothetical swap ratio between RIL and RPL has been in the range of 21 - 10x, giving an average of 15.7x and median of 15.3x.
However, if the ratio is more than around 18x, it would be adverse for RPL shareholders. While any swap ratio of more than 20x would be beneficial for RIL shareholders.

In the United States, half a million jobs evaporated last month. Businesses are closing down every day. Banks are afraid to lend, credit market continues to be tight. Consumer confidence is dwindling. Every expert and non-expert has declared that the US economy is in the worst recession since the 1929 Great Depression. But the US dollar is unfazed; it continues to enjoy strong confidence in a world economy shaken by financial turmoil. The greenback is getting stronger every day just as the US economy is plunging deeper into recession. Actually this is the whole point of mystery that remains unsolved. Dollar’s resurgence is a puzzle when compared with how currencies of other countries collapsed in national or regional financial crises in the past two decades. It has happened in argentina in 1999-2002 and with mexico in 1994. Financial crises in these countries not only caused substantial depreciations of their currencies, but also flight of foreign, and sometimes even domestic, capital. So far there is no shine off the value of the dollar, nor any major flight of foreign capital from American shores.

What’s with the greenback? Against all odds, how has it regained in the past four months what it lost against most currencies in the previous three years? Clearly, the dollar has benefited from the fact that it continues to be the international currency of exchange, trade and reserve. The strengthening of the dollar is also helped by the fact that Japan and the economies of the euro zone are as deeply sunk in recession as is the American economy and growth in China and India is projected to be lower than it had been in the previous few years.

Most of all, fright in world financial markets has sent investors running away from risky assets towards the US dollar and US treasury bonds. In the worst financial crisis since the Great Depression, the dollar has regained almost half of what it lost in the past six years. Consequently, American businesses are becoming less competitive as compared to foreign businesses. This will dampen demand for American exports and increase its imports. American multinational corporations will also find that returns to their investments abroad decline, when expressed in dollars. american investors who have suffered decline in purchasing value shall benefit from strengthening of dollar.

While the world economy is looking towards Asia, in particular China and India, for economic growth in the coming five years, Asian economies in turn depend heavily on US consumers. The recent depreciation of the Chinese yuan, said to be triggered by the slackening of export orders, is an indicator. A weak Chinese currency is expected to keep US demand for Chinese goods buoyant, while the recession in the US would dampen it. However, if the US economy remains in a prolonged recession, it would be foolish to expect that somehow the US would continue to increase its purchase of goods from the rest of the world to keep the world economy going, and it would be foolish and even dangerous to keep financing American imports through debt. China can keep its economy growing at double digits by using its $2 trillion reserves. The Chinese government has announced a $600-billion initiative to boost its economy over the next two years. The boost can help China maintain its potential economic growth even with slackening of US imports. It is clear that world economic growth in the next two to three years would heavily depend on Asian economies.

Asian economies have to creatively invest their resources in productive activities instead of parking them in US treasuries. That’s the only way Asia can bring the world economy out of recession.