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MUMBAI, March 1

THE Reliance group today announced the merger of its two flagship companies to create a Rs 65,000-crore (approximately) integrated giant in the oil refining, petrochemicals and textiles sector. The group said it would merge Reliance Petroleum Ltd (RPL) with its flagship company, Reliance Industries Ltd (RIL).

The merger may earn the company a place in the Fortune 500 list of companies. Currently, only IOC is the Indian company that figures in the elite list of global companies.

Analysts who track the two companies closely are expecting the swap ratio in the range of about 10 to 13 shares of RPL for every share of RIL. This is also in line with the market price of the scrips. RIL closed at Rs 322.15 on the Bombay Stock Exchange today and RPL closed at Rs 28.60. RIL holds 64 per cent stake in RPL, which is likely to come down by about 4-5 per cent post-merger.

A release from the group said the boards of the two companies would meet on March 3 to consider a scheme of amalgamation under Sections 391-394 of the Companies Act, 1956, and also to consider interim dividend.

RIL is the country's largest private sector company in terms of profits, net worth and assets and RPL is the largest in the private sector in terms of sales.

Analysts were stumped by the sudden announcement by the group. Even though an "eventual merger'' of the two companies has been expected, the timing has caught almost everyone off guard. They feel that the reason for the merger could be the group's interest in the Government disinvestment programme.

A merged giant would be in a much better position to bid for Bharat Petroleum or Hindustan Petroleum. The group recently lost the race for IBP where Indian Oil Corporation pipped it to the post and for VSNL where the Tatas beat it.

One analyst said that RPL's business has been under pressure and it may show a decline in business by the end of the year. He said it might be pressured further in the decontrolled scenario, especially since its marketing agreement with IOC appears to be off. RPL would also need to raise resources for its reported capacity expansion plans. According to reports, the company is planning to raise refining capacity from the current 27 mmtpa to about 40 mmtpa over the next five years.

An analyst with a foreign bank said the group may be preparing for post-APM decontrol competition. "When competition walks in with decontrol, it (Reliance) would be one consolidated giant with end-to-end operations along the petrochemical chain,'' he said. He said it could also be an attempt to enhance market capitalisation to improve share value.

The merger would bring down the cyclicality of its business and the balance sheet strength increases substantially, said another analyst. He also said a consolidated entity would also command a better price if it offers minority stake to `new' players in the sector.

The huge investment plans the group has lined up for its infocom venture may be another reason for the merger. Reliance plans to spend about Rs 25,000 crore on its infocom venture. RIL has a 45 per cent stake in the venture and even though the balance sheet is quite strong, it would mean substantial annual capital expenditure.

Even though the expenditure is not big enough to make a dent on the balance sheet, over a 2-3 year period it could create a cash flow risk and then risk premium may come into play when the company accesses the markets for resources.

For the first nine months of the current fiscal, RIL reported a net profit of Rs 2,142 crore on a sales of Rs 18,390 crore. Total assets of the company as on March 31, 2001, was Rs 29,875 crore. RPL's net profit for the first nine months ended December 31, 2001, stood at Rs 1,269 crore on a sales of Rs 25,497 crore.

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