AN

CASE STUDY ANALYSIS

ON MERGERS AND ACQUISITION IN OIL AND ENERGY SECTORS SUBMITTED TO MS. ESHA PANDYA S. R. LUTHRA INSTITUTE ON 12/03/2012.
OF

MANAGEMENT

SUBMITTED BY, PIYUSH MEHTA DHAVAL TRIVEDI

MERGERS AND ACQUISITIONS IN OIL AND ENERGY SECTORS

There are various mergers and acquisitions taken place in oil and energy sectors which have get global attention, among which some of the important ones are explained below.

THE RILRPL MERGER

Key highlights of the Merger:

1. In 2002, Reliance Petroleum Ltd (RPL) merged with Reliance Industries Ltd, in the largest merger in the Indian Corporate industry.

2. During the year 2002, the Board of Directors of RIL and RPL unanimously approved the merger , with retrospective effect from the April 2001, with necessary approvals.

3. The Boards of both the companies recommend an exchange ratio of 1 share of RIL for every 11 shares of RPL. Shareholders of both companies approved merger with overwhelming majority with 99.9%

4. The merger has created Indias only world scale, fully integrated energy company, with operations in oil and gas exploration and production, refining and marketing, petrol chemicals, power and textiles.

5. The merger was in line with global industry trends for enhancing scale, size, integration, global competitiveness, financial strength and flexibility to pursue future growth opportunities in an increasing.ly competitive global environment.

6. The merger has led to 32 % increase in Reliance equity from 1054 crore to 1396 crore. Reliance also accounted for 25 % total profits in private sectors in India and 7 % of the market capitalization and weightage of 16% in the Sensex.

FACTORS TOOK INTO CONSIDERATION IN THIS MERGER

1. Continued progress in hydrocarbon sector reforms and regulation. 2. Dismantling of the administered pricing mechanism in the refining industry. 3. The Governments decision to grant marketing rights for the transportation fuels to the private sector

SUBSTANTIAL BENEFITS OF THE MERGER TO THE RIL

1. Scale 2. Integration 3. Global Competitiveness 4. Operational Synergies 5. Cost Efficiencies 6. Productivity Gains

ADVANTAGES OF THE MERGER:

1. The merger was aimed to help RIL create a great deal of synergy. Nearly 25% of RPLs output is used for captive consumption, bringing in large savings in terms of sales tax, because these transaction are treated s inter divisional transfers.

2. The merger was aimed to create Indias only world scale fully integrated energy company with operations ranging from oil and gas exploration, production, refining and marketing of petrochemicals , power and textiles.

3. The merger has lead to financial strength also. Under the terms of merger , shares of RPL held by RIL representing 28 % of RPLs equity share capital.

4. The other big advantage is huge depreciation cover from RPL. RILs plant are relatively older and have used up its depreciation cover to a large

extent , while RPL , whose refinery was set up in last 10 years enjoys a huge depreciation cover on its assets worth 25000 cr. This will also handy in saving taxes.

5. The merger helped RIL to insulate the petrochem business against price volatility of naphtha, a feedstock for its cracker. With increasing global competition and decreasing profit per barrel from 4.69 US $ dollar to 1.45 US $ dollar , it makes sense when entire chain of oil business is integrated from exploration to refining to marketing and distribution.

CHALLENGES:
1. With the deregulation of Oil and Energy sector , the regime of assured return come to an end . There is strong possibility of increasing future global competition and RIL being largest producers is certain to face stiff challenges from low cost producer from East and Middle East part of Asia Pacific

2. Any economic slowdown can adversely impact demand supply dynamics and profitability of all industry players.

RELIANCES ACQUISITION OF IPCL

1. As the Disinvestment process of the PSU. IPCL was acquired by Reliance Industries. In the process of biding three companies submitted their bids and RILs successful bid of RS 1491 cr i.e. RS 231 per share was highest was in comparison to the IPCL target price of Rs 128.

2. IPCL was second largest petrochemical company in terms of sales, assets, net worth and profit. The acquisition of IPCL by RIL resulted in a large integrated petrochemical company which possessed a mix of competitive gas and naphtha based assets. This acquisition provides benefits of scale, integration, operations, synergies, logistical advantages, cost reduction and efficiencies.

INDIAN OIL CORPORATIONS ACQUISITION OF IBP

1. As a part of disinvestment process , IBP was the first national company to go for disinvestment and IOC and Shell was the first ones to place their bids for that. 2. IOCs offer at Rs 1153.61 cr Rs was by far the highest and Shells valuation was Rs 595 cr. Thus by this disinvestment government stake come down to 26 % from 59.58%

SYNERGIES
1. Acquisition has led to incremental cash flow for the IOC and it could also avoid likely losses by pre-empting a bid by aggressive competitor.

2. In the north and east India, IBP has strong retail presence ,whereas IOC has substantial refining capacity.

3. With the acquisition , Indian Oil had over 9000 retail outlets which will increased to 50 % of the countrys network of over 18000 outlets.

ONGCS ACQUISITION OF MRPL

MRPL (Mangalore Refineries and Petrochemical Ltd) , the first joint sector refinery had been acquired by the ONGC in year 2003.

MRPL was jointly handled by the Government of India, Hindustan Petroleum and Rayon Industries Ltd. MRPL contributes to 8% of the countrys refining capacity.

The problem of MRPL was the capital structure adopted by the management i.e. high-debt equity ratio and the joint management of AV Birla Group and HPCL was also an issue for its failure.

ONGC acquired 37.4 % from the AV Birla Group Companies at Rs 2 per share, and subscribed to additional equity of Rs 600 crore to increase its holding to 51%. In all ONGC spent 659.4 cr for obtaining stake 51 % in MRPL. With these acquisition , HPCL shareholding was reduced to 17 % from 37.4%

DISCUSSION OF QUESTIONS

1. What was the significance of the RIL-RPL merger? Answer: The merger was significance to the RIL in many following factors
such as continued progress in hydrocarbon sector reforms and regulation and dismantling of the administered pricing mechanism in the refining industry and the Governments decision to grant marketing rights for the transportation fuels to the private sector. Apart from these factors there are following benefits to RIL: 1. Increasing its Scale 2. Making Integration more strong 3. Enhancing Global Competitiveness 4. Creating Operational Synergies
5. Cost Efficiencies and Productivity Gains can be created.

SIGNIFICANCE OF THE MERGER:

1. The merger was aimed to help RIL create a great deal of synergy. Nearly 25% of RPLs output is used for captive consumption, bringing in large savings in terms of sales tax, because these transaction are treated s inter divisional transfers.

2. The merger was aimed to create Indias only world scale fully integrated energy company with operations ranging from oil and gas exploration, production, refining and marketing of petrochemicals , power and textiles.

3. The merger has lead to financial strength also. Under the terms of merger , shares of RPL held by RIL representing 28 % of RPLs equity share capital.

4. The other big advantage is huge depreciation cover from RPL. RILs plant are relatively older and have used up its depreciation cover to a large extent , while RPL , whose refinery was set up in last 10 years enjoys a huge depreciation cover on its assets worth 25000 cr. This will also handy in saving taxes.

5. The merger helped RIL to insulate the petrochem business against price volatility of naphtha, a feedstock for its cracker. With increasing global competition and decreasing profit per barrel from 4.69 US $ dollar to 1.45 US $ dollar , it makes sense when entire chain of oil business is integrated from exploration to refining to marketing and distribution.

2. Discuss the consolidation strategy of oil majors like IOC and ONGC? Answer: Consolidation Strategy used by IOC and ONGC:
1. Acquisition has led to incremental cash flow for the IOC and it could also avoid likely losses by pre-empting a bid by aggressive competitor.

2. In the north and east India, IBP has strong retail presence, whereas IOC has substantial refining capacity.

3. With the acquisition, Indian Oil had over 9000 retail outlets which will increase to 50 % of the countrys network of over 18000 outlets.

4. MRPL was jointly handled by the Government of India, Hindustan

Petroleum and Rayon Industries Ltd. MRPL contributes to 8% of the countrys refining capacity.The problem of MRPL was the capital structure adopted by the management i.e. high-debt equity ratio and the joint management of AV Birla Group and HPCL was also an issue for its failure.

5. ONGC acquired 37.4 % from the AV Birla Group Companies at Rs 2 per share, and subscribed to additional equity of Rs 600 crore to increase its holding to 51%. In all ONGC spent 659.4 cr for obtaining stake 51 % in MRPL. With these acquisition , HPCL shareholding was reduced to 17 % from 37.4%