RNRL/RPOWER.
Merger – EVENT UPDATE 5th July,
2010
RELIANCE POWER , RELIANCE NATURAL TO MERGE IN SHARE
SWAP DEAL
Reliance Natural Resources Ltd. (RNRL) and Reliance
Power Ltd. (RPower) agreed to merge in a share swap
deal as Anil Ambani consolidates his businesses after losing
a bid to keep buying natural gas at low cost from Reliance
Industries.
The merger will be through the exchange of one RPower share for every four RNRL shares.
valuations by KPMG.
Why the Merger?
CMP (R
The transaction is valued at as much as 500 billion rupees ($11 billion) based on
1 M Re
RNRL was born out of the demerger of Dhirubhai Ambani's Reliance empire five year ago. The
purpose of creation of RNRL was for sourcing, supply and transportation of fuels, primarily natural
gas. As per the demerger scheme, RNRL was to source natural gas from Reliance Industries and
trade it to ADAG power plants including the proposed mega 7,800-MW Dadri unit being set up by R-
Power. However, with the Supreme Court on May 7 upholding the government policy on pricing and
utilisation of natural gas, RNRL almost had no role left in supply of gas to R-Power. According to
government's Gas Utilisation Policy, trading or profiteering from natural gas sales is not allowed – no
3 M Re
company can buy the fuel from a producer and sell it to an end consumer like a power firm for a
margin. Suppliers like RIL can only enter into a Gas Sales and Purchase Agreement (GSPA) with an
actual user of gas. Since RNRL has no power project, it has to resell the gas to RPower. This could be
construed as trading in gas. The best way to avoid this complication was to merge RNRL with
RPower. Then, RPower projects can directly get gas from RIL.
6 M Re
Shareholding Pattern….
As per the deal, RNRL shareholders
for their four shares would get one
share of Reliance Power. Currently,
promoters have little over 55% in
RNRL (90 crore shares) and close to
85% in R-Power (203 crore shares).
Following the share-swap, promoters
of RNRL would get about 22.5 crore
Reliance Power shares -- taking the
total number of shares held by
promoters in R-Power to 225.5 crore
shares. The total number of shares
will also go up to around 280 crore,
leaving around 81%stake for
promoters. At the same time, the
public shareholders of RNRL for their
73.64 crore share,
1
would also get 18.4 crore shares of Reliance Power -- which together with the pre-merger public
holding of 36 crore shares would take the total public holding in R-Power to about 54 crore shares.
Accordingly, the public holding in Reliance Power would increase to around 19%, not far from the
required threshold of 25% (indicated by the Govt. recently) and the gap could be easily filled with
stake sale to some strategic or financial investors. The entire process would result in a 17% equity
dilution in RPower.
Who Benefits…..
The merger announcement doesn`t come as a surprise as it was expected as it is the only resort for
RNRL and is a move towards consolation for the ADAG group.
Reliance Natural’s shareholders will benefit from the proposed amalgamation by participating
in future growth prospects of Reliance Power’s diversified generation portfolio of 37,000
megawatts, and its substantial coal reserves in India and abroad.
The merger will accelerate Reliance Power's plans for setting up as much as 10,000
megawatts of gas-based power plants. As per Supreme Court's direction, RIL and RNRL
entered into a new GSMA last week. The new GSMA is consistent with the government's gas
utilisation policy. Reliance Power will derive substantial benefit from RNRL’s Gas Supply
Master Agreement (GSMA) with RIL. By merging the companies, Reliance Power may be able
to get gas through Reliance Natural’s supply agreements without having to pay potential
extra marketing margins.
For Reliance Industries, it does not make difference what happens to RNRL as a standalone or
a merged entity since the gas agreement was with R-Power. Also R-Power`s gas based plants
will require supplies when they become operational may be in the next 2-3 years. Moreover,
the new contract does not mention the volume, tenure or price of gas, but only lists the
requirement of gas at ADAG`s proposed units, including the 7,800-MW Dadri plant and the
Shahapur plant in Maharashtra. However, post merger Reliance Industries is expected
to take a small stake in RPower.
