INSIGHT: Valuation key behind Reliance bid for LyondellBasell

23 November 2009 15:02  [Source: ICIS news]

Chairman Mukesh Ambani of Reliance IndustriesMUMBAI (ICIS news)--LyondellBasell is an attractive prize if it can be secured at the right price.

While Reliance Industries’ offer for LyondellBasell - the world’s largest polypropylene (PP) producer and ranked fourth on the ICIS top 100 with sales of $50.7bn in 2008 - has been confirmed, the two companies have not disclosed financial details.

Sources familiar with the transaction say Reliance’s initial offer is in the $9-12bn range, a number made possible by a drop in LyondellBasell’s enterprise value to around $9bn after its US arm filed for Chapter 11 bankruptcy protection. The company had an enterprise value of around $31bn before its problems started, estimates one source.

“That makes the Reliance valuation very compelling, but LyondellBasell could easily go for $18-20bn,” says a financial analyst.

He points out that International Petroleum Investment Co’s (IPIC's) acquisition of NOVA Chemicals was at about eight times earnings before interest, tax, depreciation and amortisation (EBITDA).

“LyondellBasell’s earnings before interest, tax, depreciation, amortisation and restructuring costs (EBITDAR) were about $750m for the last three months. If the company keeps up that run rate then EBITDAR for the full year would be $3bn. So Reliance’s offer of $12bn would be four times EBITDAR, which is very good for one of the largest chemical companies. But I think this is a very small number,” he adds.

A $12bn bid, he says, would also give room for another company to outbid Reliance.

LyondellBasell has yet to announce if other companies have put in offers, but names have already started floating around in the industry. IPIC is a likely candidate. And the others could be Sinopec and Saudi Aramco, says the first source.

LyondellBasell has also drawn up an alternative reorganisation plan that will involve taking the company public and offering equity to secured creditors.

“As LyondellBasell is in [bankruptcy] court, anyone and everyone can express interest as long as he can prove that he has the experience and the capacity to run the company,” the first source adds.

Reliance has the cash to pay more, but a bidding war is something that it would be keen to avoid. It has in the past lost other acquisition opportunities, such as BP’s Innovene, because of conservative valuations.

It is early days yet and the $12bn number could change once Reliance completes its due diligence and submits a final offer, possibly by January 2010, which is when LyondellBasell is looking to emerge from bankruptcy protection.

But a second source familiar with the transaction says that Reliance can always go to the court for an extension.

“Due diligence on deals of similar complexity has taken seven to eight months to complete,” he says, referring to a failed bid by India’s Sterlite Industries to acquire Asarco, the bankrupt US copper producer. That process dragged on for 18 months with the bankruptcy court eventually rejecting Sterlite’s bid in favour of Grupo Mexico, the original owner of Asarco.

Companies that submit preliminary bids for LyondellBasell will have an opportunity to evaluate its business plan for the next few years. This plan would provide details on projected earnings and assumptions made on feedstock costs. Valuations would depend on the perceived earnings potential of the company.

The court is then likely to take the views of employees and bond holders into account before deciding on what’s best for LyondellBasell.

Read John Richardson and Malini Hariharan’s contributions to the ICIS Asian chemical connections blog
For more on Reliance Industries and LyondellBasell visit ICIS company intelligence
To discuss issues facing the chemical industry go to ICIS connect

By: Malini Hariharan
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