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Reliance’s Lyondell Basell bid rejected – Implications

March 2, 2010

Despite Lyondell Basell being a strategic fit, the bid not going through is a better outcome, as it saves Reliance Industries Limited from getting drawn into a bidding war and thus potentially over-paying for the assets. Also, LB would have added more deep cyclical earnings to RIL at a time when RIL’s gas business is improving the company’s earnings profile by adding a more steady cash flow. If RIL has to add cyclicality in order to grow, we believe E&P makes more sense, either for supply security of its 1.24mn b/d refining capacity or for entry into unconventional oil and gas businesses.

However, watch out for the price that RIL is willing to pay to grow and whether that harms its improving cash returns profile. Technological knowledge could prove to be a barrier to RIL’s successful inorganic growth in the E&P space, forcing it to pay a
premium, in our view.

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