RIL talks with Aramco likely back on track
RIL is finalising the O2C separation as its talks for a stake-sale to Aramco are back on track, according to reports.
RIL is finalising the O2C separation as its talks for a stake-sale to Aramco are back on track, according to reports.
RIL on Tuesday announced the demerger of its oil-to-chemicals (O2C) operation into an independent, wholly-owned subsidiary. This entity will entail a $25 bn interest-bearing loan from the parent. This is viewed by RIL as an efficient mechanism to upstream cash, including any potential capital receipts. All the marketing, refining and petchem assets will be transferred to the new O2C entity, but the upstream business will remain with RIL's standalone entity. Approvals have been received from the markets regulator and stock exchanges, a report by BoFA Securities said.
Post this transaction, RIL would be left with much a smaller business.
"We believe this would be a critical step in the demerger process as O2C assets will move into a new arm, its debt will continue to sit inside RIL. As per proforma balance sheet, O2C assets would be $42 bn vs consolidated RIL assets of $152 bn. As per the company, there will be no change in RIL's cost of capital and borrowings & RIL is expected to retain its investment grade international & domestic ratings. The company will now seek approvals from shareholders, creditors and NCLT in the first quarter of the year starting April. The entire process is expected to be completed by 2QFY22," the report said.
The O2C business contributed more than 60 per cent to the group's revenue and around 50 per cent of consolidated EBITDA in FY20. However, this contribution has been reducing, with the overall company focus shifting towards consumer businesses such as telecom and retail.
"Recent unconfirmed media articles report that RIL is finalising the O2C separation as its talks to do a stake-sale to Aramco are back on track," the report said.
Currently, RIL owns the largest single site refinery complex globally with a capacity of 1.4 mmbpd. It is also one of the leading petchem producers across the value chain. High complexity and feedstock flexibility have been advantageous for the O2C business. Going ahead, RIL is keen on developing and accelerating its New Energy and New Materials business. RIL has planned investments in carbon capture, renewables and hydrogen production to move towards carbon neutrality by 2035, it added.
Standalone RIL's plan to foray into green energy will be also be liked by investors, brokerage Nomura said in a note.
It said Reliance has indicated that it plans to build an optimal mix of reliable, lean and affordable energy using solar, wind and batteries.
The new energy business of RIL will work closely with subsidiary O2C. O2C will invest in carbon capture (to convert CO2 into useful products and chemicals) and hydrogen production to meet H2 demand as the Indian economy moves from carbon-based fuels to a hydrogen economy.
The RIL standalone entity, apart from holding controlling and majority stake in O2C (100 per cent post de-merger), Reliance Retail (85.1 per cent) and Jio Platforms (67.3 per cent), will now foray into new businesses based on clean and green development.
RIL plans to have a mix of renewable energy using a mix of solar, wind and batteries to transition acceleration into a hydrogen economy. This new business will work closely with O2C and target to achieve net carbon zero by 2035.
According to RIL management, a loan to O2C would make it more efficient to upstream cash from any potential stake sale in O2C. "We note that in the past, Reliance has considered a potential 20 per cent stake sale in O2C to Saudi Aramco at a valuation of $75 billion. This transaction would have resulted in potential receipt of $15 billion. A higher loan of $25 billion indicates that Reliance could consider even more than 20 per cent stake sale to strategic investors and dedicated PE investors. In our view, any stake sales to raise cash would be taken positively by investors, similar to the large cash raise in 2020 when it sold stakes in Jio and Retail," Nomura said.
Morgan Stanley said in a research note that RIL's demerger plan for Oil to Chemicals (O2C) business is a step towards monetisation and acceleration of its new energy and material plans into batteries, hydrogen, renewables and carbon capture - all of which point to the next leg of multiple expansion and clarity on the next investment cycle.
"With this reorganization, RIL will have four growth engines - digital, retail, new materials and new energy. While the market appreciates the value for the first two businesses we see significant upside risk to earnings and multiples for O2C as RIL invests in new energy/technology," Morgan Stanley said.
CLSA said this O2C subsidiary will hold debt in the form of a $25 bn loan from the parent priced at a floating interest rate linked to one-year SBI MCLR and another $5bn of non-current liabilities.
"We believe this demerger should pave the way for a stake sale in O2C to strategic (talks with Aramco continues) and financial investors," it said.
"Using the $75bn EV announced for the non-binding 20 per cent stake sale to Aramco in August 2019), will translate into an equity value of $45 billion after knocking off the $30 billion liabilities at the subsidiary level. So a 20 per cent stake sale at $75 billion EV, may bring in $9 billion cash into Reliance," CLSA said.
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