Cheap and Best?
Just when it was beginning to look like India’s largest private sector company isn’t in a mood to participate in the frenzy to buy out international assets, it decided to grab a piece of the global action. Two pieces actually. Last fortnight Reliance Industries (RIL) announced two acquisitions in different parts of the world (prior to this, its last overseas buyout was of Trevira’s polyester capacity in Germany in 2005).
First, the Mukesh Ambani mega-corp said it was purchasing a majority stake in the East Africa-headquartered Gulf Africa Petroleum Corporation (GAPCO).
In less than a week, Ambani followed this up with an announcement that RIL would pick up the assets of Hualon Corporation, a Malaysia-based polyester and textiles manufacturer. In between this M&A flurry, the RIL top brass also revealed that it would merge IPCL, a former public sector undertaking that was acquired in 2002, into the flagship.
Global size and scale have always been RIL’s virtues—it is the largest polyester manufacturer in the world, and the Hualon purchase makes it larger by a fourth—and now it’s adding outposts in international markets to its domestic firepower. However, what makes RIL’s global play slightly different is its reluctance to make flashy multi-billion dollar buyouts.
Both deals are small relative to RIL’s size. In 2006-07 RIL had revenues of $27.37 billion; Hualon’s last reported top line stood at just $800 million, or 2.9 per cent of RIL’s sales. Although the company hasn’t revealed the cost of acquisition, it’s evident that Ambani’s focus is on distressed but operating assets, and quality ones, to boot. In other words, it prefers to buy on the cheap, and turn around the fortunes of the capacities thanks to the advantages of integration, economies of scale and costcontrol that it possesses.
Hualon, for instance, has accumulated a loss of $300 million, and is weighed down by debt of $1 billion. Issues of bad debt have resulted in it being under receivership since November 2006.
But the attraction clearly for Reliance is that the unit has been operating virtually at full capacity. Says Arun Kejriwal, Director, KRIS Securities: “Reliance has not really had a strong presence in South Asia. What they have bought is really a geographical presence. Besides, there are no new capacities coming up in the region. Finally, they have bought capacities at a cost less than that of putting up new capacities.”
According to a report put out by DSP Merrill Lynch immediately after the takeover announcement, RIL can add value to Hualon by supplying inputs like Purified Terephthalic Acid (PTA) and Monoethylene Glycol (MEG) from its surplus capacity. It is expected that the realisation on Hualon’s specialty polyester grades will be 25-30 per cent higher than that on non-specialty grades.
Indeed, RIL is no stranger to buyouts of ailing petrochemicals capacities. It’s been adding on units since the late 1990s, a time when supply overshot demand, and Southeast Asia slipped into a financial crisis (see Stress on Distress).
The acquisition of GAPCO too isn’t in the big-ticket bracket. But it works for Reliance as it provides a market for its export-oriented refinery. The Mauritius-headquartered GAPCO owns and operates large storage terminal facilities and a retail distribution network in African countries like Tanzania, Uganda, and Kenya.
RIL, in a statement, outlined that this would help in Reliance’s downstream plans by integrating the entire value chain consisting of refining, shipping, trading, terminalling and marketing through retail and wholesale segments. GAPCO operates more than 250 outlets covering retail and industrial segments.
The markets for their part have given a thumbs up to RIL’s international moves—DSP Merrill Lynch has put a 12-month target of Rs 2,340 on the stock. That price may well be reached sooner, with the stock closing at Rs 2,028.45 on September 17—which means that it has almost doubled over the past year.
What gave the stock a further fillip on Dalal Street was a merger with IPCL and, more importantly, the end of the uncertainty over the pricing of the gas it is set to produce (see All’s Well That Ends Well). The mantra clearly is high returns, low-risk—the latter clearly reflected in RIL’s relatively undersized buyouts last fortnight.
