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Reliance – RPL Merger Deal Analysis

March 2, 2009

FreePress broke the news this morning about 1:16 swap ratio for RPL merger into RIL. RIL will extinguish the treasury stock from the merger and issue additional 69 mn (4.4% of current RIL share base) for minorities in RPL.

Analysis of the Deal:
It gives RIL access to about US$1.5 bn-US$1.8 bn of RPL’s annual cash flows (on full ramp up) for its various planned projects. Further, the consolidated entity, with 1.24 mn b/d of refining capacity, would have more leverage in crude sourcing, exporting products and also managing refinery utilization during the cyclical downturn without governance issues.

Chevron’s exit will give RIL’s promoters full control of the future direction of the company. The merger will aalso see, operational synergies, saving of indirect taxes and potential dividend distribution tax (contingent upon the structure of Petroleum Trust) from the amalgamation are likely to offset the marginal dilutive impact.

Post-merger, RIL’s consolidated EPS is expected to be Rs 109 for FY10 and Rs 128 for FY11. With a forward valuation of 10x its earnings, the stock appears to be fully priced as there are better bargains available in the market today. Citi expects RIL’s consolidated EPS to be Rs 130 and Rs 160 for FY10 and FY11 which is extremely optimistic in our view considering the GRMs and crude oil prices.

[Will shortly unveil a separate Research Section, with all the updates to help you make your own decision.]

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