Reliance: The LyondellBasell Impact

By now you must have probably heard that Reliance Industries has decided to acquire LyondellBasell also known as the world’s  third largest manufacturer of chemicals.It is refreshing to talk about Reliance in a context which does not involve the battle of the Ambani brothers in the Supreme Court and news of an acquisition interest like this is a guaranteed news maker. Reliance has offered Ten billion dollars to buy LyondellBasell and it is doing so in style. An all cash deal-no fuss, no tangle. With the pile of cash Reliance is sitting on it’s no wonder that Mukesh Ambani finds himself the richest Indian in the world even past steel Czar Lakshmi Mittal in the Forbes List of Indian Billionaires.

From a company point of view, analysts have been tentative about this deal. Reliance and Lyondell do different things. One is an oil and natural gas exploration and marketing company while Lyondell makes chemicals with a refining arm similar to RIL.

Businesswise Lyondell’s scope of business is mildly similar territory for Reliance. Make no mistake about it though; this is a blockbuster deal and one which should hold good for a long time .So if you are a Reliance Industries shareholder then in the long run you have plenty of reasons to be happy. The value to the shareholder does increase if the deal goes through because Reliance gets to expand.

In the short run bankers have fears about the practical nature of the all cash deal.10 billion dollars is a huge amount but nonetheless Reliance has put it’s cash reserves to good use .So these worries are needless and squabbles over technicalities. Lyondell has filed for chapter 11 bankruptcy so in one way Reliance will be acquiring the company at a very cheap price were the deal to go through. As is clear from this article bankers are worried about the debt that might be placed on Reliance’s shoulders.

In the short term you might see some pressure on the Reliance stock but if you’ve been watching Reliance during the past few sessions then you’ll know that the stock is rallying pretty well-especially for a large cap.

Frankly I cannot say if the market is accounting the buying by including news of the LyondellBasell acquisition or it is simply reacting to the announcement that the record date for issue of bonus shares of Reliance in the 1:1 ratio is November 27^th. Maybe it could even be a combination of both but news of the bonus shares is definitely causing the stock to rally more so than the acquisition news.

It’s only after the 27^th that we can say for sure how much of the LB factor is being accounted by the markets.

Long term value is therefore the key aspect both for RIL management and shareholders. Lyondell’s sales in 2008 alone were around Fifty billion dollars. Reliance won’t be wasting any time in generating sales as the infrastructure already exists.

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