The Hindu : Significant merger

Online edition of India's National Newspaper
Tuesday, Mar 12, 2002

Opinion

Opinion - Editorials

Significant merger

THE MERGER OF the two flagship companies of the Reliance group — Reliance Industries (RIL) and Reliance Petroleum (RPL) — will create a new entity that is truly big by Indian standards and comparable to many international companies in similar lines of business. It will have a turnover of more than Rs. 60,000 crores, net profit of nearly Rs. 5,000 crores, gross assets of more than Rs. 40,000 crores and a market capitalisation of almost Rs. 49,000 crores shared by 35 lakh shareholders. Impressive as those financial numbers are, their true significance lies more in the abilities they confer on the Reliance group in exploiting the synergies. Post-merger, RIL will be a petrochemical behemoth encompassing the entire value chain in the petroleum business, from crude oil exploration and refining to most downstream products, yarn, fibre and plastics and even textiles. The merger will bring all these activities under one company. Apart from the economies of scale, it will result in a substantial savings in taxes and augmentation of depreciation benefits.

The benefits of the RIL-RPL merger extend even beyond the exploitation of synergies however. There is an astute sense of timing in consummating the merger. It is clearly intended to take full advantage of two important developments in economic policy — the opening up of the petroleum sector and the acceleration of the decade-old disinvestment process. The petroleum sector is about to be deregulated with the recent budget announcing the finer details of the dismantling of the administered price mechanism. Vast business opportunities and along with them intense competition will emerge from April 1. For instance, private sector oil companies can enter the lucrative business of marketing petroleum products. Reliance now markets its products through Indian Oil. It needs to put in place a distribution network for its products. While the record of the group suggests that it can roll out a new network in quick time, there is more than a hint that it will achieve the same objective by participating in the coming disinvestment programme of the two integrated Government-owned petroleum companies — BPCL and HPCL. The fact that in the recent sale of the public sector petroleum distribution company IBP, Reliance though an aggressive bidder lost out to Indian Oil should hold valuable lessons. Controlling stakes in the public sector oil companies are not going to come cheap.

After the merger which will take retrospective effect from last year, RIL can leverage its new, considerably bolstered balance-sheet to raise funds. It is already in the running for acquiring IPCL, the petrochemical major now in the final stages of a strategic sale. It is also a potential buyer of a controlling stake in the Dabhol Power Company. The merger would give RIL the necessary clout to take on international and domestic competition. Looking beyond the disinvestment programme, RIL would be investing heavily in the newer areas of telecom and information technology where it already has a solid if understated presence. Over the past decade and a half, Reliance has pioneered many developments in the corporate sector. It has been the first company to convincingly enthuse the stock markets through the partly convertible debenture route, among the first to see the potential of the merger and acquisitions route and the only Indian corporate to tap dollar funds for very long periods. For the company, the recent merger is both an important landmark as well as a convincing demonstration yet again of its ability to take full advantage of the emerging scenario.

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