Reliance Industries (RIL) is in the course of action of carving out its oil-to-chemical (O2C) company into a separate new subsidiary with a $25-billion loan from the parent. The move is directed towards unlocking worth in the company with a doable stake sale and embarking on the next level of investment cycle with a concentrate on clean power. With approvals from Sebi and stock exchanges in location, RIL will seek a nod from shareholders and creditors in the initially quarter of the next monetary year.
RIL proposes to transfer all its refining, petrochemicals and marketing and advertising assets to the O2C entity, which incorporates the 51:49 fuel marketing and advertising joint venture with BP, 74.9% elastomer JV with Sibur, Recron/RP Chemicals Malaysia, trading subsidiaries, ethane pipeline and all other associated assets. The O2C scheme becomes productive with appointed date of January 1, 2021.
The firm will transfer $40 billion of extended-term assets, $2 billion of net working capital and $5 billion of non-existing liabilities to the O2C entity for a consideration of $25 billion of extended-dated loan and $12 billion of equity from RIL, it stated in a presentation. RIL expects the separation to be completed by September.
RIL’s rationale behind building a standalone firm is to let the new entity pursue possibilities across O2C worth chain via self-sustaining capital structure and devoted management group. “(It) facilitates value creation through strategic partnerships and attract dedicated pools of investor capital,” it stated.
The firm additional stated that the management manage of O2C will continue to be with RIL, although there will be no dilution of earnings or any restriction on money flows and the firm expects to retain its investment grade international and domestic credit ratings. O2C re-organisation final results in no modify in shareholding of RIL and no effect on consolidated monetary position, it stated.
While the O2C demerger is not anticipated to have any effect on consolidated numbers, it ought to boost outlook on stake sale in O2C company. “The loan of $25 billion to O2C at floating interest rates (linked to SBI’s 1-year MCLR) will make up-streaming of potential stake sale in O2C more tax efficient,” analysts at Nomura observed.
The separation of the O2C company to a subsidiary also facilitates a possible stake sale to Saudi Aramco, which, Sweta Patodia, analyst (corporate finance group) at Moody’s Investors Service observed will allow a additional reduction in RIL’s net debt.
In the previous, RIL had deemed a possible 20% stake sale in O2C to Saudi Aramco at a valuation of $75 billion, which would have resulted in possible receipt of $15 billion. “A higher loan of $25 billion indicates that Reliance could consider even more than 20% stake sale to strategic investors and dedicated PE investors,” analysts at Nomura stated.
Analysts at Morgan Stanley point out that with this reorganisation, RIL will have 4 development engines- digital, retail, new components and new power. “RIL’s de-merger plan for Oil to Chemicals (O2C) business is a step towards monetisation and acceleration of its new energy and material plans into batteries, hydrogen, renewables and carbon capture – all of which point to the next leg of multiple expansion and clarity on the next investment cycle,” they stated.
Highlighting that the new foray into green power will be liked by investors, analysts see a considerable upside danger to earnings and multiples for O2C as RIL invests in new power and technologies.