The first blog analyzed the acquisition of Rohm & Hass by Dow Chemicals and Ciba by BASF. There was further analysis of other companies that could go about with a similar strategy of acquisition. A month later after writing that blog, Reliance Industries (the largest petrochemical company in India and one of the largest in the world) on November 24th announced its interest in acquiring financially burdened petrochemicals maker LyondellBasell. The acquisition is expected to make Reliance a leading chemical-manufacturer in the world. It will give Reliance access to 19 countries where LyondellBasell has its presence. It will also give Reliance access to Lyondell’s technology patents. Chinese company Sinopec earlier expressed interest in LyondellBasell acquisition but later backed out of it.
Reliance has quoted that it is willing to pay $12b for the acquisition. If the deal goes through, Reliance will be inheriting a debt of $19.3 billion and litigations faced by Lyondell from creditors and debtors. LyondellBasell has assets worth $27.1billion and debt of $19.3b. Reliance has the financial power to fund its acquisition. Unlike Dow which was relying on Kuwait Petroleum Authority deal to fund for its acquisition, Reliance has enough cash and fund-raising power by itself to fund for the deal.
Reliance revenues and EBIT from its three major sectors (refining, petrochemicals, Oil & Gas) are:
Sector Revenues EBIT
Refining 68.10% 28.80%
Petrochemicals 26.60% 46.80%
Oil & Gas 5.10% 24.30%
Source: October 2009 financial report presentation from Reliance Industry website
In the following table, percentage of revenue is shown per 1000 units and EBIT is calculated as percentage of this revenue.
Sector Revenue (per 1000 units) EBIT (units) EBIT/Revenue
Refining 681 196.13 0.29
Petrochemicals 266 124.49 0.47
Oil & Gas 51 12.39 0.24
This table shows that even though Refining is the major revenue and Earnings generator, it’s EBIT to revenue ratio is less. This sector is getting matured and is not going to be a major earnings driver. Oil & Gas sector is a promising growth sector where it contributes 25% of EBIT from just 5% of revenue. Petrochemicals sector is in between these two sectors and it is a good strategy for Reliance to find partners or go in for acquisitions in this sector to expand its revenue and market. For the near term, it is relying on domestic market demand for growth opportunities. However, this is not going to be enough in the long term.
In the current economic and industry scenario, companies are available for acquisitions in low valuations and this would be a good opportunity for Reliance to enter global markets. Acquiring LyondellBasell which is into petrochemicals will be a strategically good opportunity for Reliance.
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