Reliance Industries is reportedly in talks with Aramco in which the Saudi oil giant could take a 20% stake in the oil-to-chemicals business that the Mukesh Ambani-owned conglomerate plans to divest later this year.

Aramco is believed to have offered to make the $ 15 billion investment through a combination of cash and its stocks.

RIL could be offered a 1% stake in the Saudi entity and the rest in the form of installment cash payments – a proposal the Ambanis seemingly balk at, as it could delay debt reduction plans in the business of ‘O2C.

In its plan to reorganize the petroleum-chemicals business that was put in place in February, RIL had provided for a long-term loan of $ 25 billion “with repayment flexibility as an effective mechanism to return cash to RIL. of any strategic investment in O2C ”.

Reports suggest that Aramco is offering its shares as a partial payment that will come with a freeze, effectively canceling plans to prepay debt to the parent company.
Sources said talks between the two sides were ongoing, but it was still too early to say whether an agreement would be reached on a cash and stock payment mechanism.
They said that during negotiations a number of proposals are launched without confirming whether the cash and stock option is on the table.

Rumors of a deal gained credibility after the London-based Financial Times reported last week that talks had resumed in recent weeks. He said Aramco initially offered to pay for O2C’s stake with its shares and make cash payments over several years. The report, however, added that the ratio of shares to cash was still to be debated and terms had not yet been finalized.

The report renewed optimism that Mukesh Ambani could have good news for RIL shareholders which could be announced at the annual general meeting in July, or even sooner if both sides can define the rough contours of the agreement.

If that happens, it would be reminiscent of the wave of negotiations last year when RIL raised Rs 1.52 lakh crore by making deals with a group of investors including Facebook, Google and sovereign wealth funds. Abu Dhabi – Abu Dhabi Investment Authority (ADIA) and Mubadala Investment Company – by offering strategic stakes in its Jio platforms.

RIL raised another Rs 47,200 crore from global private equity funds in Reliance Retail Ventures. It also launched the largest rights issue of Rs 53,124 crore ever in India. The transactions were essential in transforming RIL into a net debt-free company.

The case looms

Hopefully, there could be a recall this year – accidentally at a time when the Indian economy is going through the second wave of the pandemic.
Last week, while announcing results for the fourth quarter ended March 31, 2021, RIL did not provide any update on the Aramco transaction that the market has been eagerly awaiting to hear about.

Interest in the deal was reignited after Saudi Aramco announced in August last year that it was undertaking a due diligence exercise before taking a stake in the petroleum-to-chemical (O2C) business.

This is a sort of recurring, recurring deal that Mukesh Ambani first announced in 2019 that Aramco would recoup 20% of its O2C business for an enterprise value (EV) of $ 75 billion.

Since then, progress on the deal has been slow, marred by the Covid crisis and Aramco’s inability to raise $ 100 billion in December 2019 from what was billed as the largest IPO ( IPO) to the world.

Saudi Crown Prince Mohammed bin Salman recently hinted at talks to cede a minority stake in the Saudi national oil company to a foreign investor.
Although he did not reveal any details, he only stressed that it would be “very important in strengthening sales of Aramco in the country where this company resides”, which sparked speculation that he was talking about RIL.

Higher rating

Interestingly, if Saudi Aramco offers a 1% stake in RIL, the deal would be valued at well over $ 15 billion, meaning the parties are considering a higher valuation for RIL’s 02C business. than what had been determined two years ago.

This also needs to be seen in light of the fact that brokerage firms are now offering an enterprise value of $ 50-60 billion for that business, based on a sum of the parts assessment.
The O2C business straddles five business segments: fuels, polymers, elastomers, aromatics and fiber intermediates, and polyesters.

The O2C activity represented sectoral turnover of Rs 320,008 crore – 51.9% of the gross value of Rs 616,911 crore of sales and services of all RIL activities during the year ended March 31 .

Jefferies analysts said the benefits RIL would derive from any deal with Aramco would depend on how it is structured.

“If a significant portion of the proceeds is in Aramco stock with a lock-in, and the cash payments are spread over a few years, debt reduction would be delayed and RIL would be exposed to volatility in Aramco’s stock price. However, if O2C activity is valued higher than the $ 75 billion quoted earlier to compensate for Aramco’s lack of liquidity, the deal could be neutral in our view. If the consideration is liquid, then it would benefit RIL in the following ways: some parts would go to reduce the debt of the stand-alone entity, and some parts would go to finance the new O2C cracker, ”they added.

“Our conversations with investors highlight current expectations of any O2C stake sale that brings billions of dollars in liquidity to RIL, which it would use either to further reduce debt or for new business investment. If RIL accepted a stake from Aramco in return for a sale of an O2C stake, the implicit assumption would be that of a surge in oil prices within the next few years for such a structure to create value. JP Morgan analysts said in a note.