RIL closes in on big-bang overseas acquisition

Rohini Singh & Piyush Pandey  RELIANCE Industries (RIL), India's largest private sector company by market capitalisation and sales, is close to announcing a major overseas acquisition.      If all goes according to plan, RIL is looking to do so before its annual general meeting on November 17, a source close to the development said.      The likely target is a part of the assets owned by troubled petrochemical major LyondellBasell, which is undergoing reorganisation under the protection of a US court. "The intent is certainly to make an announcement on the day of the AGM or very close to it but that depends on how the talks progress," one person familiar with the transaction said.      A team of senior RIL officials is said to have been camping in New York since September, according to a senior banking source. All the people with direct knowledge of the deal who we contacted for this story spoke on condition of anonymity because the transaction had not yet been consummated.      ET spoke to a number of bankers and analysts to ascertain the possible size of the transaction. One banker said the transaction could be in the region of $6 billion and may include both the US and the European assets of LyondellBassell.     Earlier media reports had referred to a deal in the region of $3.35 billion for the company's US assets. An external spokesperson of RIL, who responded by e-mail to ET's questions, said the company was evaluating global opportunities. "Reliance Industries is reviewing a number of global opportunities for growth in its core business. The difficult operating environment of the past year has made available several interesting opportunities, where an investment by a strategic operator of industrial assets can add substantial value." Lyondell to give RIL ready market      THEspokesperson said the review is on and there can be no assurance that any approach will be made with respect to the opportunities under review or that any such approach will result in a transaction. He declined to elucidate further.      While the contours of the deal are not clear, RIL may only buy part of the assets of its target. Jal Irani, head of research at Macquarie Securities, told ET the deal had synergies for RIL. "RIL will enjoy a lot of synergies if it acquires LyondellBasell. It will benefit from state-of-the-art technologies of LyondellBasell. Besides, its marketing and distribution network come in handy. LyondellBasell will provide a ready market for RIL and RIL may turn it around if it is able to source feedstock at a cheaper rate." He refused to comment on the size of the deal.      RIL is the only major Indian business house without a marquee overseas acquisition. The Tata Group famously acquired steel company Corus and automobile company Jaguar Land Rover while the Aditya Birla Group has bough aluminium maker Novelis. Rumours of RIL making a big overseas acquisition have been doing the rounds for years. In an interview with ET NOWlast month, RIL's chairman Mukesh Ambani had said that an overseas acquisition was one of the options as the company sought new growth opportunities after the completion of the Jamnagar refinery and the start of production of natural gas from the Krishna Godavari basin.      Maurice Bannayan, a senior official in RIL's refinery business, had been recently quoted in agency reports as saying that RIL was considering overseas acquisitions in the US and Europe. Mr Bannayan was speaking on the sidelines of a conference in Abu Dhabi. RIL may also be trying to diversify outside India, partly as a reaction to recent events in the country. The company's top leadership, according to people familiar with their thinking, has become disillusioned by the uncertainty created by the prolonged litigation with Anil Ambani's Reliance Natural Resources over the price and supply of gas from the KG basin and frequent changes in India's tax regime.      A senior RIL official who spoke to ET this summer expressed frustration and annoyance over the curtailing of tax benefits for pipelines carrying natural gas. An unlisted company, which is part of the RIL Group, is building a pipeline network to carry natural gas from the KG basin off India's eastern coast.      LyondellBasell had posted a loss of $7.3 billion on annual revenues of $50.7 billion. It has $27 billion of assets and $19 billion of debt. On Friday, the RIL scrip closed at Rs 1,956, up 0.87%. RIL, the potential acquirer, is smaller. It had a profit after tax of $3 billion on a topline of $29 billion for the year ended March 31, 2009.      The RIL overseas acquisition buzz started getting louder after the company raised Rs 3,188 crore by selling its treasury shares recently. The company had cash reserves of $4 billion or about Rs 19,421 crore as on September 30.      LyondellBassell is the outcome of a number of mergers. Lyondell Chemical Company was earlier listed on the NYSE. It was the third largest chemical company in the US. In December 2007, it was acquired by Basell Polyolefins for $12.7 billion to create LyondellBasell — one of the world's largest polymer, chemical and fuel companies. RIL has been eyeing the company after it filed for Chapter 11 under the US Bankruptcy Code in January 2009.      In May 2009, LyondellBasell Industries gained an additional owner in German investor Andreas Heeschen, whose firm ProChemie Holding has joined with Lyondell-Basell owner Access Industries to create ProChemie GmbH, a joint venture in which each side will own 50% equity in LyondellBasell. This deal was structured to give Access Industries flexibility to invest additional funds in LyondellBasell as part of the bankruptcy process, but without triggering unfavourable tax consequences for the company.      In September this year, the company submitted its reorganisation plan and disclosure statement to the US Bankruptcy Court to emerge from Chapter 11. The United States Bankruptcy Court for the Southern District of New York is administering this restructuring and reorganisation process.      As part of the Chapter 11 process, LyondellBasell obtained approximately $8 billion in debtor-in-possession (DIP) financing to fund continuing operations. The DIP financing includes two credit agreements: a $6.5-billion term loan (comprising $3.25 billion in new loans and a $3.25 billion roll-up of existing loans) and a $1.62 billion asset-based lending facility, according to media reports.      Bank of America-Merrill Lynch, Royal Bank of Scotland and Citigroup are among the lenders to the company, which obtained debtor-in-possession financing of $8.1 billion in February this year.      LyondellBasell is learnt to be offering a partial exit to these bank lenders by offering equity through a rights issue. Bank of America-Merrill and Citigroup are believed to be involved in the deal with RIL as investment bankers. According to earlier reports the lenders may get into a preoffer arrangement, under which RIL will pick up some of the forfeited rights and directly pay the lenders for the stake, entailing a minimum payment of $3.35 billion or Rs 15,000 crore.      The primary products of LyondellBasell are polymers (polyethylene, polypropylene), chemicals (styrene, ethylene) and fuel (two oil refineries — one in Houston, one in France). The Houston refinery processes heavy crude (mostly from Venezuela) and has a capacity of 13.5 million tonnes/year.  The other refinery in France, which was purchased from Shell in 2008, has a capacity of 5 million tonnes. The US arm of the company had filed for bankruptcy protection on January 6, 2009.On September 15, LyondellBasell announced it will shut its 185,000 tonne a year low density polyethylene plant (LDPE) in the UK.  WHAT FAVOURS AN ACQUISITION  1. LyondellBasell is under Chapter 11 bankruptcy protection, under which 10 or more manufacturing sites are to be closed. These could be up for sale. 2. There will be some efficiency in raw material (particularly crude oil) sourcing as RIL is also a large buyer. 3. LyondellBasell has a technology division which owns the rights to several manufacturing processes (for polymers) and makes some catalysts. RIL wants to expand its polymer business. 4. RIL doesn't have any large capex projects lined up over the next few years. The company may consider the inorganic growth route. WHAT DOSEN'T  1. LyondellBasell, like RIL, is a bulk chemical manufacturer. Margins inthis business are not very high. 2. RIL already has 60 million tonnes of brand new refining capacity which gives better-than-usual margins. Another 15 million tonnes of capacity in high-cost markets such as US/Europe doesn't make much sense. 3. The company has some class action suits going on, one of which is related to lead paint manufacture.4. RIL has in the past said it feels there are enough growth opportunities in India — though that could change as they have found the going tough of late. 5. RIL has never made a big-ticket acquisition outside of India — the largest was Traveira, which hasn't worked very well. 6. RIL's problem in refining and petrochemicals is that it is a bulk supplier — it doesn't have access to markets. LyondellBasell wouldn't change that.