Dalal Street Business - The Intelligent Indian Investor

Mukesh Ambani's Move to Checkmate Chevron

Monday, November 26, 2007

Are you worried about sky rocketing fuel prices ? You wouldn't be, if you are a shareholder of RIL. Mukesh Ambani's intelligent move to bring in Chevron was one of the cleverest moves to create wealth for RIL shareholders. RIL is a cash rich company and it could have gone solo for the Reliance Petroleum Ltd [RPL] project, instead in the usual Ambani style it is creating wealth on others money :-)

RIL held 75% and Chevron held 5% in RPL, remaining 20% is being held by others. RIL has acquired the shares at various prices with effective purchase price around Rs 20. It sold 4.01% stake in RPL at Rs 4023 crore thus making a profit of Rs 3662 crore for RIL shareholders.

Now according to IPO offering for Chevron, the latter has an option to increase the stake upto 29% in RPL by April-2009. Chevron would also be eligible for 5% discount on refining done at RPL. If Chevron does not exercise its option to increase its stake to 29% by the stipulated period, RIL will buy back Chevron's 225 mn shares (5% stake) at Rs60, Chevron's initial purchase price.

Based on the last traded price of RPL (Rs 210), Chevron would have to pay Rs226 bn (US$5.7 bn) to RIL for the additional 24% stake (1.08 bn shares). Chevron's total acquisition cost for 29% equity stake in RPL would be Rs240 bn which is very close to the entire project cost of Rs 270 bn.

RIL has effectively invested Rs67.5 bn [Rs 6750 crore or $1.68 bn] in RPL for its 75% stake. After the 4.01% stake sale [Read beginning of article], its effective investment in RPL is 27.3 bn [Rs 2730 crore] for its 71% stake.

Hats off to Mukesh's intelligent moves to create wealth for RIL shareholders :-) Questions and Comments are welcome.

Labels: Reliance-Chevron-Insider-View

2 Comments:

At Monday, December 3, 2007 4:51:00 PM IST, Anonymous said...: My view is someone is just manipulating market by all these different news. My question is how authenticate is this information of Chevron. From where it originated and why now? Why is was missing when RPL was 110? The missing part for this news is - Chevron can extend their holding up to 29%. What if they extend only 1%? What are the different ways in which Chevron can exit? Also, Chevron is big company and I doubt they will miss simple points like this in the agreement. Also, making money like this will not present Ambani is right picture to the international community. So I believe this news is purposely spread. Retail investor's will come to know only after 6 months from now the exact details. So protect your capital! Regards,
Abhay
At Monday, December 3, 2007 6:59:00 PM IST, Webmaster said...: Very Good Question Abhay.

Nobody including Analysts tracking the stock anticipated Mukesh to complete the refinery 5-6 months ahead of schedule. This means RPL coffers will start filling sooner.

Going into the depth, no new refining capacities have been added in the United States due to environmentalists. Chevron is getting a discount on refining done here at RPL by virtue of its holding.

Chevron can decide to exit RPL venture at Rs 65 [Issue Price] Even in that case it would mean they extended interest free loan to RPL for 3 years ;-)

I agree to some extent there is always speculation in Reliance group stocks. Look at Reliance Energy Ltd which is not even worth Rs 1000 is quoting at Rs 1900. Its a MAD MAD BULL Market :-)