Reliance Industries announced the contours of its demerger of its O2C (oil-to-chemicals) business into a wholly-owned subsidiary, in order to attract global investors like Saudi Aramco and sought shareholder and creditor approval.
In a late night notification to the exchanges, RIL said the reorganisation will enable focused pursuit of opportunities across O2C value chain, improve efficiencies through self-sustaining capital structure and dedicated management team attract dedicated pools of investor capital.
ET in its edition dated 20th February was the first to report about the details of the restructuring that many company watchers also see as a step towards long term succession planning.
The exercise has gathered momentum as negotiations with Saudi Aramco is again back on track after months of pause due to the ongoing pandemic. Post April, physical meetings are due to kickstart once again.
Once completed, RIL, the company founded by Dhirubhai Ambani in the late 1960s, will house only the upstream exploration and production business, including the KG-D6 block, financial services, group treasury and the legacy textile businesses, and act as a holding company of the group.
The O2C business will include oil-to-chemicals business consisting of its refining and petrochemicals assets, fuel retail (51% in a JV with BP), global subsidiaries in UK, US among others including its JV with Sibur, bulk and wholesale marketing businesses among others and will get hived off into a step-down subsidiary via a slump sale, to be initially wholly owned by RIL.
The group owns one of the world’s largest and most integrated O2C complexes in Gujarat. The vertical historically has been the cash cow for the entire group, contributing 62% of the revenue and 58% of the total operating profit in FY20.
The exercise is expected to get all regulatory, legal, shareholder and creditor approvals by Q2FY22.
RIL is giving a $25 billion, 10 year loan to this newly created arm for buying the assets of the 02C businesses. Even though the O2C assets will move into a new arm, its debt will continue to sit inside RIL. In August 2019, RIL had agreed to upstream Rs 1.08 lakh crore of Reliance Jio’s debt to make its telecom venture debt free, ahead of inducting strategic and financial investors like Facebook, Google, KKR, TPG, PIF among many others.
As on December 2020, RIL’s gross debt stood at Rs 2.57 lakh crore ($35.2 billion) at the end of December 2020 compared with Rs 3.36 lakh crore ($44 billion) in FY20. Analysts peg 50% of that on account of the O2C business.
To give comfort to its lenders, the cash balance of the group will remain within parent RIL. The company is sitting on cash and cash equivalent of Rs 2.20 lakh crore ($30.2 billion) at the end of December 2020 quarter against Rs 1.75 lakh crore ($23.2 billion) at the end of March 2020.
Moreover, RIL is also working on a structure wherein the interest cost that the O2C arm will bear for buying the assets will be equal to the interest cost that parent RIL bears for its outstanding loans.
Last September, in a regulatory filing, RIL had said, the rationale of the scheme would be to unlock value in the vertical since the nature of risk and returns in the O2C business are distinct from the other businesses of RIL and this business attracts a distinct set of investors and strategic investors.
RIL had reorganized the refining and petrochemicals segment as oil-to-chemicals (O2C) from 3QFY21 onwards, disclosing O2C financials as a separate division. However, it also stopped reporting GRM and segmental EBITDA.
In August of 2019, Mukesh Ambani first announced his plans to sell a 20% stake in the oil-to-chemical business to Saudi Aramco for $15 billion at an implied $75 billion valuation.
Since then, Goldman Sachs and Citi have been working with Reliance and Aramco. Sources said those discussions have again intensified after months of lull due to the pandemic. “Ambani wants to wrap up all approvals and lender consent within the next 2 months. Accordingly, the whole exercise has gathered full momentum. Diligence exercise had stopped in between on account of travel bans but is again picking up. But this is a multi-decade old relationship and the two sides are in sync,” said an official in the know.
In the first nine months of FY21, the O2C business had revenue of Rs 2.18 lakh crore with an operating profit (EBITDA) of Rs 26,763 crore ($3.8 billion).
The total asset base of the O2C business is Rs 3.60 lakh crore at the end of December 2020, which accounted for 28% of its total asset base of RIL.
