Introduction

Restructuring is a process by which a firm does an analysis of itself at a point of time

and alters what it owes and owns, refocuses itself to spec tasks of performance

improvements. Restructuring would sometimes radically alter a firm's capital

structure, asset mix and organization so as to enhance the firm's value.

Reasons for restructuring:

There are basically six reasons why companies are going for restructuring:

The globalization of business has compelled Indian companies to open new

export houses to meet global competition. Global market concept has

necessitated many companies to restructure because lowest cost producers only

can survive in the competitive global markets.

Changed fiscal and Government policies like deregulation/decontrol has led

many companies to go for newer market and customer segments.

Revolution in information technology has made it necessary for companies to

adapt new changes in the communication/information technology for improving

corporate performance.

Many companies have divisionalized into smaller businesses. Wrong

divisionalization strategy has led to revamp themselves. Product divisions which do

not fit into the company's main line of business arc being divested. Fierce

competition is forcing Indian companies to relaunch themselves.

Improved productivity and cost reduction has necessitated downsizing of the

work force - both at works and managerial level.

Convertibility of rupee has attracted medium-sized companies to operate in the

global markets.

Broad Areas of restructuring:1

The following are the broad areas of restructuring:

Financial Restructuring: This involves decisions relating to acquisition, mergers,

joint ventures and strategic alliances. This also deals with restructuring the capital

base and raise finance for new projects.

Technological Restructuring: This involves investment in research and

development and also alliances with overseas companies to exploit technological

strengths.

Market Restructuring: This involves decisions regarding the product market

segments where the company plans to operate based on its core competencies.

Manpower Restructuring: This involves establishing internal structures and

processes for improving the capability of the people in the organization to respond

to changes.

A good restructuring exercise consists of a mixture of all these. These alterations

have a significant impact on the firm's balance sheet by redeploying assets or by

exploiting unused financial capacity.

Techniques of Corporate Restructuring:

(1) Mergers and Amalgamations - The terms merger amalgamation and acquisition

are often used interchangeably to denote the situation where two or more

companies, keeping in view their long-term business interest, combine into one

economic entity to share risks and financial rewards. Amalgamation is an

arrangement for bringing the assets of two companies under the control of one

company, which may or may not be one of the original two companies.

Amalgamation sign Pies the transfer of all or some part of the assets and liabilities of

one or more existing business entities to another existing or new company.

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(2) Takeovers - Takeover is a business strategy whereby a person acquires control

over the other company - either directly by acquiring assets or indirectly by

controlling management. Takeover is a part of business strategy for acquiring control

over another business to consolidate and acquire large share of the market. The

legal eyes of raiders are on the lookout for cash cows and high growth rate

companies with low equity stake of promoters.

(3) Joint Venture - Joint ventures is a business enterprise for profit, in which two or

more parties share responsibilities in an agreed manner, by providing risk capital

technology, patent/trademark/brand names and access to market. Joint ventures

with multinational companies contribute to the expansion of production capacity,

transfer of technology and capital and above all penetrating into global market.

Entering into a Joint venture is a part of strategic business policy to diversify and

enter into new markets, acquire finance, technology, patent and brand names.

(4) Business Alliances - The concept of alliance is gaining importance in

infrastructural sectors, more particularly in the areas of power, oil and gas. The basic

idea is to facilitate innovative ideas and techniques while implementing large

projects, with the common objective of reduction in cost and time, and sharing

(5) Foreign Franchises - Franchising provides an immediate access to business

operations and technology in profitable fields of operations. It is an important means

of doing business in several countries and represents an effective combination of the

advantages of large business with the motivation and adaptation capabilities of small

or medium scale enterprises. The concept of franchising is quite comprehensive and

covers an extensive range of marketing and distribution arrangements for goods and

services. Franchises are becoming a key mechanism for technological marketing

and service linkages between enterprises within a country as well as globally.

Definition and Meaning:

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• Mergers: When the shareholders of more than one company, usually two, decide

to pool the resources of the companies under a common entity, 'Merger' is the

result.

• Amalgamation: As a result of a merger, f a new company comes into existence; it

is a process of Amalgamation.

• Absorption: If as a result of a merger, one company survives and others lose their

independent entity, it is a case of Absorption.

• Acquisitions or Take-over: If one company acquires the controlling interest in

another company, it is a case of ‘Acquisition or Take-Ever.

Types of Merger & Acquisitions:

1) Horizontal - A horizontal takeover or merger is one that takes place between

two companies which are essentially operating in the same market. Their

products may or may not be identical.

2) Vertical - A vertical takeover or merger is one in which the company expands

backwards by takeover of or merger with a company supplying raw materials

or expands forward in the direction of the ultimate consumer. Thus, in a

vertical merger, there is a merging of companies engaged at different stages

of the production cycle within the same industry.

3) Conglomerate - In a conglomerate takeover or merger, the concerned

companies are in totally unrelated lines of business.

Merger of Reliance Industry Limited with Reliance Petroleum Limited

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Introduction to company

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Reliance Industries Limited

Reliance Industries Limited (RIL) is India's largest private sector company on all

major financial parameters with a turnover of Rs. 1,39,269 crore (US$ 34.7 billion),

cash profit of Rs. 25,205 crore (US$ 6.3 billion), net profit (excluding exceptional

income) of Rs. 15,261 crore (US$ 3.8 billion) and net worth of Rs. 81,449 crore (US$

20.3 billion) as of March 31, 2008.

RIL is the first private sector company from India to feature in the Fortune Global 500

list of 'World's Largest Corporations' and ranks 103rd amongst the world's Top 200

companies in terms of profits. RIL is amongst the 30 fastest climbers ranked by

Fortune. RIL features in the Forbes Global list of the world's 400 best big companies

and in the FT Global 500 list of the world's largest companies. RIL ranks amongst

the 'Worlds 25 Most Innovative Companies' as per a list compiled by the US financial

publication-Business Week in collaboration with the Boston Consulting Group.

Reliance Petroleum Limited

Reliance Petroleum Limited (RPL) is a subsidiary of Reliance Industries Limited.

RPL is setting up a greenfield petroleum refinery and polypropylene plant in a

Special Economic Zone at Jamnagar in Gujarat. With an annual crude processing

capacity of 580,000 barrels per stream day (BPSD), RPL will be the sixth largest

refinery in the world. Merger of reliance industry and reliance petroleum limited . it’s

kind of vertical merger

Merger Details:

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Under the terms of the proposed merger, RPL shareholders will receive 1 (one)

share of RIL for every 16 (sixteen) RPL shares held by them.

The appointed date of merger of RPL with RIL is 1st April 2008. RIL will cancel its

holding in RPL. Based on the recommended merger ratio, RIL will issue 6.92 crore

new equity shares to the existing shareholders of RPL. This will result in a 4.4%

increase in equity base from Rs 1,574 crore to Rs 1,643 crore. Consequently, the

promoter holding in RIL will reduce from 49.0% to 47.0%

Reasons of merger

The prime motivating factors for this merger appear to be to gain “dinosaur”-like size

which will strengthen RIL’s balance sheet. In the short term, it may also help the

company play down the expected under-performance in the current fiscal. The way

to look at the merger though is that it was always waiting to happen. There seem to

be two main reasons why RPL was floated.

Similar track

In the present instance, the announcement has been made on Friday, February 27

while the board meeting to finalise the merger is scheduled for Monday, March 2.

This is, of course, only a symbolic similarity. There are larger, more serious

similarities between the two mergers.

First, the merger in 2002 came on the back of a difficult period for RIL in its (then)

main business of petrochemicals. The company had seen a fall in sustainable

earnings growth in two of the three quarters ending December 31, 2001.

Petrochemical prices were soft and the economy was down, leading to demand

contraction.

The last couple of quarters of this fiscal have similarly been difficult ones for RIL;

earnings actually declined in the third quarter ended December 2008 — the first such

decline in 12 quarters. There are also murmurs in the market — unsubstantiated, of

course — about potential losses facing the company in crude futures market

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positions, currency exposure and in the foray into retailing. We may never know how

correct these murmurs are. Yet, the fact is that the company is facing a tough time

on the earnings front.

Back in 2002, the merger of the original RPL was backdated to be effective from

April 1, 2001 and speculation then was that this was done to mask the under-

performance of RIL by combining the cash-rich RPL business with itself. Going by

this logic, chances are high that the current merger will also be with retrospective

effect from April 1, 2008.

Second, the merger of the original RPL in 2002 benefited RIL in terms of a large

depreciation cover along with other tax benefits as RPL supplied a couple of

products to RIL. In the present instance, the merged RIL will benefit tremendously

from the tax benefits that the new RPL enjoys by virtue of its location in a special

economic zone (SEZ).

Such benefits include income-tax exemption for 100 per cent of profits derived from

exports in the first five years of operations of the RPL refinery and 50 per cent of

profits for the next five years. Besides, the new refinery will not have to pay excise

duty and service tax for products and services, respectively, sourced from within

India. It will also be exempt from stamp duties on land transactions and loan

agreements.

The third similarity is likely to be in the share exchange ratio. If past mergers are any

indication, the ratio could be skewed in favor of RIL shareholders.

The merger of the original RPL where each share of RIL was exchanged for 11 of

RPL favored RIL’s shareholders. Speculation on the exchange ratio for the present

merger ranges between 1:16 and 1:19 based on the market prices of the two shares.

No synergies

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There was at least a façade of business synergies in the merger of the original RPL

with RIL. The original RPL was supplying naphtha and a couple of other refinery by-

products to RIL’s petrochemical complexes. Such synergy is not evident between the

new RPL and RIL. Except for RPL’s refinery being technologically more advanced,

there is no difference between it and RIL’s existing Jamnagar refinery.

Crude oil sourcing benefits are touted as an advantage from the merger but nothing

prevents joint sourcing of crude in the international market by the two companies

jointly. Indeed, the group was setting up trading desks in international centers to

source crude for the two companies.

EPS accretive:

Mukesh Ambani said the merged entity would be an EPS accretive merger. The

reason they said this is, the equity dilution was only 4.4 per cent of RILs expanded

equity and they expect RPL to contribute more than that and that would mean that it

would be accretive to the RIL share holders and RIL equity from that perspective. 

Tax benefit:

On Tax issues, the management made it very clear that the merger was going to be

tax neutral and both the entities would enjoy continue with the same tax benefit they

are currently enjoying. They won't be any benefits which will spill out to the other

entity. 

RPL will continue to get SEZ benefits, while RIL will continue to get EoU benefits and

on a consolidated basis there wont be about much of an impact. The merged entity

would be an operational synergy at a scale at which they would be able to use.

There won’t be any gains or losses caused by taxes and they were very particular on

that. 

Merger Benefits and Synergies:

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The merger will unlock significant operational and financial synergies that exist

between RIL and RPL. It creates a platform for value-enhancing growth and

reinforces RIL’s position as an integrated global energy company.

The merger will enhance value for shareholders of both companies. The merger is

EPS accretive for RIL. Through this merger, RIL consolidates a world-class, complex

refinery with minimal residual project risk, while complementing RIL’s product range.

There will be further gains from reduced operating costs arising from synergies of a

combined operation.

The merger will result in RIL:

Operating two of the world’s largest, most complex refineries

Owning 1.24 million barrels per day (MBPD) of crude processing capacity, the

largest refining capacity at any single location in the world Emerging as the

world’s 5th largest producer of Polypropylene

What next:

The product which will come out of RPL would be ultra clean fuel which will be sold

in markets like Europe and the US and both these markets are facing a severe

downturn in terms of demand coming in.

RIL believes, over the next 12-18 months they will see demand coming down by

nearly a million tons per day. Currently, the demand in these markets is about 80

million tones and now it will come down by another million tons per day over the next

12-18 months. The cost efficiency of refineries will come into play and they will be

able to sell the product much earlier because the existing refinery will not be able to

use the cost efficiency but they have a high cost structure and that would be the key

point going forward. 

Future of RPL shareholders

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Book value of RIL shareholder as of March 31, 2009, which is likely to be the

effective date of the merger, would be 700, while that of RPL would be Rs 30.

How he arrived at book value: Reliance Industries has been in existence for the last

30 years. So there has been an accretion in the value of the fixed assets of the

company, while RPL being a new company, there has not been much accretion. The

project cost of RPL of Rs 27,000 crore can be taken at about Rs 30,000-33,000

crore as of today.

Therefore, a shareholder of Reliance Industries will be shouting if the ratio is

anywhere more than 24 to 1 because that is the ratio working out, based on the book

value. If market value is the criteria for swap ratio, it works out to about 16-17.

Ratio would definitely be negative for RPL shareholders.

Future of RIL shareholders

Tulsian said that RPL itself is entitled under Section 10AA; therefore RPL’s profits

would be exempted for the first five years being an EOU (Export Oriented Unit). “This

merger is not being mooted or moved with a view to have any tax advantage

because RPL as such is entitled, all its profits will be exempted for the first five years

to the extent of 100% of Section 10AA being a 100% EOU.”

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