RIL announces demerger of oil-to-chemical biz as talks with Aramco resume

Reliance Industries on Tuesday announced the demerger of its O2C (oil-to-chemical) business into a wholly-owned subsidiary as the company eyes mega deals in future, including with oil behemoth Saudi Aramco.

The notification, issued late night on February 23, seeks shareholder and creditors' approval on the company's plan to demerge its O2C business.

RIL has said the independent growth of the company will enable the focused approach towards opportunities across the O2C value chain. It will enhance efficiencies through self-sustaining capital structure and a dedicated management team, it said, adding the demerger will facilitate value creation through strategic partnerships and attract dedicated pools of investors.

"Reorganisation will be beneficial to all stakeholders of RIL -- management control of O2C continues with RIL, existing O2C operating team moves with the transfer of business, no dilution of earnings or any restriction on cash flows, and retaining of its international and domestic AAA credit ratings," RIL said.

Industry experts believe the demerger was announced in the run-up to negotiations with Saudi oil giant Aramco, which are being pursued again after a pause due to the Covid-19 pandemic last year.

Mukesh Ambani in August 2019 had announced talks for sale of 20 per cent stake in the oil-to-chemical business, which comprises its twin oil refineries at Jamnagar in Gujarat and petrochemical assets, to Saudi Aramco, the world's largest oil exporter. The deal was to be concluded by March 2020 but has been delayed amid the coronavirus crisis. Mukesh Ambani in RIL's annual report for 2019-20 had said both RIL and Saudi Aramco were in talks of arriving at a deal. "The partnership gives our refineries access to a wide portfolio of value-accretive crude grades and enhanced feedstock security for higher oil-to-chemicals conversion," he said.

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After the demerger, holding company RIL will have upstream exploration and production business, and financial services, treasury and textile business. RIL O2C Ltd will have an oil-to-chemical business comprising refining and petrochemicals, fuel retail, and control over global subsidiaries of RIL.

The company's O2C complex in Gujarat is the world's largest and has contributed immensely to the group's revenue. In FY20, it contributed 62 per cent of the company's revenue and 58 per cent of the operating profit.

The O2C business has long-term assets worth $45 billion and cash & equivalents worth $19 billion. The company will give it a loan worth $25 billion. For the $25 billion loans, the O2C will have to pay floating rate interest linked to a 1-year SBI MCLR rate. The long-dated loan has the flexibility to structure repayments,  which will help it self-fund growth projects.

The RIL said "the O2C undertaking will be transferred to a wholly owned subsidiary at tax net worth -- tax neutral for RIL".

The O2C reorganisation will create an independent, global scale growth engine for RIL, with strong cash flow generation potential. It will have no impact on RIL's consolidated financials, international and domestic AAA credit ratings. The demerger will help RIL with its New Energy & New Materials business for clean and green energy development. The consent process from all stakeholders will be completed by Q1FY22, and NCLT approval is expected by Q2FY22, RIL said.

Notably, from the April-December period of the current financial year, RIL's O2C business has reported a revenue worth Rs 2.18 lakh crore. The company's operating profit in this period stood at Rs 26,763 crore. The total assets of the new entity as of Q3 are worth Rs 3.6 lakh crore, around 28 per cent of RIL's total assets.

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