Reliance Industries (RIL) is in the process of carving out its oil-to-chemical (O2C) business into a separate new subsidiary with a $25-billion loan from the parent. The move is directed towards unlocking value in the business with a possible stake sale and embarking on the next level of investment cycle with a focus on clean energy. With approvals from Sebi and stock exchanges in place, RIL will seek a nod from shareholders and creditors in the first quarter of the next financial year.
RIL proposes to transfer all its refining, petrochemicals and marketing assets to the O2C entity, which includes the 51:49 fuel marketing joint venture with BP, 74.9% elastomer JV with Sibur, Recron/RP Chemicals Malaysia, trading subsidiaries, ethane pipeline and all other related assets. The O2C scheme becomes effective with appointed date of January 1, 2021.
The company will transfer $40 billion of long-term assets, $2 billion of net working capital and $5 billion of non-current liabilities to the O2C entity for a consideration of $25 billion of long-dated loan and $12 billion of equity from RIL, it said in a presentation. RIL expects the separation to be completed by September.
RIL’s rationale behind creating a standalone company is to let the new entity pursue opportunities across O2C value chain through self-sustaining capital structure and dedicated management team. “(It) facilitates value creation through strategic partnerships and attract dedicated pools of investor capital,” it said.
The company further said that the management control of O2C will continue to be with RIL, while there will be no dilution of earnings or any restriction on cash flows and the company expects to retain its investment grade international and domestic credit ratings. O2C re-organisation results in no change in shareholding of RIL and no impact on consolidated financial position, it said.
While the O2C demerger is not expected to have any impact on consolidated numbers, it should improve outlook on stake sale in O2C business. “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 business to a subsidiary also facilitates a potential stake sale to Saudi Aramco, which, Sweta Patodia, analyst (corporate finance group) at Moody’s Investors Service observed will enable a further reduction in RIL’s net debt.
In the past, RIL had considered a potential 20% stake sale in O2C to Saudi Aramco at a valuation of $75 billion, which would have resulted in potential 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 said.
Analysts at Morgan Stanley point out that with this reorganisation, RIL will have four growth engines- digital, retail, new materials and new energy. “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 said.
Highlighting that the new foray into green energy will be liked by investors, analysts see a significant upside risk to earnings and multiples for O2C as RIL invests in new energy and technology.