UpdateIndia's Reliance Industries offers to acquire LyondellBasell

23 November 2009 11:25  [Source: ICIS news]

(adds analyst comments)

By Pearl Bantillo and Prema Viswanathan

SINGAPORE (ICIS news)--Indian petrochemical giant Reliance Industries will be the biggest polypropylene (PP) player in the world if it is successful in acquiring financially-troubled LyondellBasell, analysts and industry players said on Monday.

The proposed acquisition would be the largest by an Indian company this year, with the bid estimated at between $9-12bn (€6-8bn), said a source with knowledge of the deal.

LyondellBasell, currently the leading PP producer in the world, announced over the weekend that Reliance had made a non-binding cash offer to the company.

LyondellBasell’s stated enterprise valuation in 2008 was about $9bn, down from over $30bn before the company filed for Chapter 11 protection, said a source familiar with the transaction.

Reliance Industries has the financial strength to take on major acquisitions at this time, analysts said.

The company’s level of indebtedness was not too high and it had a good cash position, as well as the ability to generate funds, said Vinay Nair, an analyst at brokerage Khandwala Securities.

Moody’s Investors Service said that as of September 2009, Reliance had around $4.2bn of cash and liquid investments and around $8 billion in treasury shares, which, if liquidated, could provide the company with significant resources to fund a potential deal without materially impacting its financial metrics.

However, Moody's analyst Ivan Palacios added that depending on the deal’s total size and whether or not the acquisition was majority debt funded, it could result in downward pressure on Reliance's current credit rating.

Another Mumbai-based analyst, who declined to be named, said: “There is a desire to take that one step further … to take them [Reliance] into the global league. But obviously, it will take them time to turn around this company.”

“It is going to be a challenge if this were to happen,” he added.

Reliance would conduct due diligence on the Netherlands-based company, whose US operation is currently under bankruptcy protection, said the source familiar with the deal.

"It is difficult to give a timeline. The due diligence will depend on regulations. Reliance will also have to talk to creditors," said the source.

Due diligence may be completed in time for a US court decision on whether or not to allow debt-ridden LyondellBasell’s US operations to exit from bankruptcy protection, he added.

“The whole acquisition would be rational if the deal is reasonable,” said Nair of Khandwala Securities.

Actual details of Reliance’s bid remained lacking, including the debt that the Indian conglomerate would have to absorb in taking on LyondellBasell, the analyst said.

“We don’t know the liabilities of the company [LyondellBasell],” Nair said.

At this point, it was difficult to gauge the affordability of the deal and the investment returns that Reliance would derive from the acquisition, he said.

From the point of view of pure business strategy, the synergy between LyondellBasell and Reliance was very strong, analysts said.

Reliance Industries, while big on exports, has all of its manufacturing facilities concentrated in India. LyondellBasell would then provide the company with a strong presence in its untapped markets, industry sources said.

“It will help Reliance tap into markets such as the US and Australia, where it has hardly any export position currently,” said a polymer trader in India.

The proposed acquisition would likely be good news for polyolefin suppliers, as there would be less competition in the market, said a source close to a Middle East producer.

Customers, on the other hand, would be at a slight disadvantage as they would have less clout, he said.

While it was still too early to determine whether the proposed transaction would happen, a complete integration of LyondellBasell’s operations into Reliance appeared to be the more beneficial option, industry sources said.

“A total integration would be good. It would bring more discipline into the market – the bigger a company is, the more corporate responsibility it would have to display,” said an Asian polymer trader who sells to India.

Reliance, however, could decide to go the way of the United Arab Emirates’ International Petroleum Investment Co (IPIC) in its deal with NOVA Chemicals and keep LyondellBasell operating as a separate entity.

“Everything depends on what happens after the acquisition – whether Reliance integrates LyondellBasell into its fold, as it did with IPCL, or whether it looks at it merely as an investment, as IPIC did with NOVA Chemicals, and allows LyondellBasell to operate as a separate entity,” said an Asian polymer trader who sells into India.

Investment bank Cazenove said that on first glance Reliance’s bid appeared an opportunistic take-over and that the deal could secure the group, which has at present 97% of its assets in India, a substantial presence in Western chemicals markets (80% of LyondellBasell’s sales).

“On a broader level, we believe that this may also signal confidence in the potential for an underlying economic recovery to boost the profitability of cyclical areas of the industry, such as polymers and petrochemicals, to which LyondellBasell has exposure,” Cazenove added.

Shares in Reliance rose by more than 1% early on Monday over news of the offer.

($1 = €0.67)

With additional reporting by Chow Bee Lin and Malini Hariharan

For more on Reliance Industries and LyondellBasell visit ICIS company intelligence
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By: Pearl Bantillo
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