Concept of merger Merger through absorption: Merger through consolidation Techniques of corporate restructuring: 1) Mergers and amalgamations 2) Take

overs and joint ventures 3) Business alliances Types of Merger & Acquisitions: 1) Horizontal - A horizontal takeover or merger is one that takes place between two companies which are essentially operating in the same market. Their products may or may not be identical. 2) Vertical - A vertical takeover or merger is one in which the company expands backwards by takeover of or merger with a company supplying raw materials or expands forward in the direction of the ultimate consumer. Thus, in a vertical merger, there is a merging of companies engaged at different stages of the production cycle within the same industry. 3) Conglomerate - In a conglomerate takeover or merger, the concerned companies are in totally unrelated lines of business. Merger of Reliance Industry Limited with Reliance Petroleum Limited About the Company The Reliance Group was founded by Late Sh. Dhirubhai Ambani and today it is India's largest private sector enterprise. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company and is the largest private sector company in India. For Reliance, backward vertical integration has been the cornerstone of the evolution and growth. It started with textiles and ever since Reliance has pursued a strategy of

backward

vertical

integration

in

polyester,

fiber

intermediates,

plastics,

petrochemicals, petroleum refining and oil and gas exploration and production. Exploration and production of oil and gas, petroleum refining and marketing, petrochemicals (polyester, fiber intermediates, plastics and chemicals), textiles, retail and special economic zones has been the core activities of the Group. Reliance enjoys global leadership as the largest polyester yarn and fiber producer. Also, it is amongst the top ten producers of the petrochemical products in the world. Major Group Companies are Reliance Industries Limited (including main subsidiaries Reliance Petroleum Limited and Reliance Retail Limited) and Reliance Industrial Infrastructure Limited. Reliance Industries Limited Reliance Industries Limited (RIL) is India's largest private sector company on all major financial parameters with a turnover of Rs. 1,39,269 crore (US$ 34.7 billion), cash profit of Rs. 25,205 crore (US$ 6.3 billion), net profit (excluding exceptional income) of Rs. 15,261 crore (US$ 3.8 billion) and net worth of Rs. 81,449 crore (US$ 20.3 billion) as of March 31, 2008. RIL is the first private sector company from India to feature in the Fortune Global 500 list of 'World's Largest Corporations' and ranks 103rd amongst the world's Top 200 companies in terms of profits. RIL is amongst the 30 fastest climbers ranked by Fortune. RIL features in the Forbes Global list of the world's 400 best big companies and in the FT Global 500 list of the world's largest companies. RIL ranks amongst the 'Worlds 25 Most Innovative Companies' as per a list compiled by the US financial publication-Business Week in collaboration with the Boston Consulting Group. RIL has Global rankings in most key businesses integrated energy company in Refining and Petrochemicals poised for large gains in the E&P sector and Large part of Indian business and capital markets, driven by organic growth of RIL. Its annual exports in excess of US$ 6 billion to over 100 countries and it is committed to large investments in key businesses refining and petrochemicals US$ 8-9 Billion in next 4-5 years

Reliance Petroleum Limited

Reliance Petroleum Limited (RPL) is a subsidiary of Reliance Industries Limited. RPL is setting up a greenfield petroleum refinery and polypropylene plant in a Special Economic Zone at Jamnagar in Gujarat. With an annual crude processing capacity of 580,000 barrels per stream day (BPSD), RPL will be the sixth largest refinery in the world.

RPL has two major promoters, Reliance Industries Limited (RIL) and Chevron India Holding Pvt. Ltd. The RPL refinery and polypropylene plant is located adjacent to the existing refinery of RIL. RPL is 75% owned subsidiary of RIL.

Merger of RIL-RPL:
In 2002, RPL, which was the first refinery project, merged itself with its parent company RIL after 7 years, RPL merged once again in 2009 with RIL. Present RPL was incorporated in October 24, 2005 to set up the second mega refinery complex.

Though the market was surprised by the announcement of the merger between RIL and its subsidiary RPL, it was expected to happen owing to the strategic fit and the changes in the global scenario. The merger of RPL with RIL was a strategic move as it enabled RIL to enjoy Economies to Scale in production and refinery of petrochemicals. It would also help in minimizing the cost of capital and capitalize on the cash flow of RPL.

The merger of Reliance Industries Limited (RIL) and Reliance Petroleum Limited (RPL) resulted in the creation of a petrochemical behemoth which encompassed the entire value chain in the business of petroleum giving the merged entity the necessary clout to take on the competition on the national and international level. According to media reports, the merger created a new entity having combined market value of about Rs.233,384 crores.

Reliance Industries Limited, after the merger, has became one of the worlds largest refinies having largest capacity at a single location. Also, it became the fifth largest polypropylene manufacturer. The two firms after the amalgamation continued to function as separate entities from the accounting point of view and therefore, the tax benefits available to RIL as an Export Oriented Unit and to RPL as a Special Economic Zone are independent from each other. In fact, this merger gave RIL greater flexibility in operational planning. RPL had its IPO in April 2006. At that time RIL had 75% stake in the company. RIL and Chevron were the joint promoters of the company with a stake of 15% and 5% respectively. But in November 2007 RIL sold its 4.01% equity stake in Indian Stock Exchange. With this RIL was left with 71% of equity shares in the company.

Reasons for merger:

There are certain reasons which are the major sources of motivation for the merger of two entities. These reasons are also common to the merger of RIL-RPL.

Synergy: It refers to the fact that the combined entity can often reduce the fixed costs and other operating costs by removing duplicate departments or operations, thereby, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins. The merger of RIL-RPL is also said to provide the merged entity with the financial and operational synergies. This is because the nature of the existing refinery and the new refinery is same and also the improved capacity and the complexity would give RIL the necessary reduction in the costs of operations. Increased revenue or market share: RIL will be amalgamating its subsidiary company (RPL) and by doing this, it would be increasing its market power by capturing increased market share to set prices. Economy of scale: The merged entity would result in the creation of the refinery which would be the worlds largest refining capacity at a single location. The increased complexity and capacity of the new refinery would help the company to maximize the profits.

Taxation: Availing the tax benefits is another major incentive for the two companies to opt for merger. But in the case of the merger of RIL-RPL, the merger will be tax neutral as after the merger both the entities will continue to enjoy the same tax benefits which they are currently enjoying. Therefore, on a consolidated basis, RIL will get the benefits of being an Export Oriented Unit and RPL will enjoy the SEZ benefits.

From the above stated points we can see that in November 2007 only it became almost clear that RIL might take a step of merging RPL. RIL has had a history of merging its subsidiaries involved in refining petrochemicals. The old RPL which started its operation in FY01 was finally merged with RIL in FY02. IPCL (acquired by RIL in FY03 as a part of privatization in India) was merged in RIL in FY07. Thus, when on March 2, 2009 RIL finally announced the merger of RPL into RIL, it shouldnt have come as a shock to the market.

Swap Ratio
The Board of Directors has approved the merger of Reliance Petroleum Limited with Reliance Industries Limited for a swap ratio of 1:16. This means that for every 16 shares of RPL, 1 RIL share would be issued. The RIL board has approved a scheme of amalgamation of Reliance Petroleum with the company under the provisions of Sections 391 to 394 of the Companies Act of 1956. Under this scheme, the RPLs shareholders will get 1 fully paid equity share of Rs 10 each of RIL for every 16 fully paid equity shares of RPL held by them. The merger follows the philosophy of RIL of creating enduring value for its stakeholders. CRISIL has affirmed an AAA rating for RIL post merger. Merger, however, will reduce the shareholding of institutional investors, while banks and mutual funds will get a higher share in the merged entity. According to some analysts, the merger would result in the fall in the promoter holding by 2% from 49% to 47% which would be due to the cancellation of the treasury stock. The merger would also lead to an increase in the retail shareholding from 16.1% to 19%.

The swap ratio of 1:16, which is marginally in favor of the shareholders of RPL, would mean a dilution of 4.4% of RILs equity. The treasury stock which has been created as a result of merger would be extinguished which would prove to be positive for the shareholders of RIL. Therefore, the merger can be said to have a neutral effect on the shareholders of both the company. After the swapping of shares, RIL will have 3.7 million shareholders and the promoters holding. If the swap ratio would have been 1:15, RIL would have to issue 8.89 crore equity shares as against the outstanding 133.3 crore of RPL shares. As a result, RILs equity would have risen to Rs 1,662.65 crore, which amounts to a dilution of just 5.6%. Similarly if the swap ratio would have been 1:17, the dilution of the promoters share in RPL would have been 1.95%.

The total number of shares of RPL is 450 crores which are represented by the promoters stake which is equivalent to 339.21 crores which accounts for 75.38% of the total number of shares. The remaining 24.62% of the shares are held by the non promoters which is equal to 110.79 crore shares. The swap ratio as decided by the Board of Directors of RIL is 1:16 which implies that for every 16 shares of RPL, 1 share of RIL will be issued. Thus, the number of shares to be issued to the promoters is 21.2 crores and to the non promoters is 6.92 crore shares. The total number of shares of RIL before the merger are 157.30 crores and after the merger the total number of shares will be 164.22 crore shares. This figure includes 28.125 crores shares representing the new shares that will be issued in lieu of the shares of RPL and 21.2 crore shares representing the treasury stock which will be cancelled by RIL. Currently, the total number of treasury shares in RIL is 19.88 crores. Hence, after the merger, the promoters stake will be 46.96% instead of 49.03%. it means that the equity will be diluted due to the merger to the extent of 2.07%.

Post merger results:

The deal enhanced the position of RIL as an integrated global energy major. Markets ascribe higher valuation for integrated energy companies vis-a-vis standalone refiners due to better competitive position and reduced earnings volatility. This merger of RPL transformed RIL to be among worlds 50 most profitable companies; top ten non-state owned refining company globally; top 15 independent upstream companies; and five largest producers of poly propylene in the world. RIL had enhanced weight ages in domestic indices, it also gained significantly from higher financial strength and flexibility.

It had operational synergies from combined business in areas such as crude sourcing, product placement, process optimization and logistics, besides consolidation of a world-class operating refinery asset.

The combined capacity of the two companies expected to be 1.24 million barrels of oil a day. At present RIL produces 6.60 lakh barrels and RPL produces 5.80 lakh barrels a day.

The merger helped the combined entity to save on income tax and dividend distribution tax.

It created a much bigger balance sheet that would help Reliance Industries raise money for working capital and expansion.

The merger of Reliance Industries and Reliance Petroleum moved towards integration of group businesses and whopping Rs 2,33,000 cr. created huge market value of a

Reliance Industries Ltd. increased the cost efficiency as merger brought down the costs of Inter-company transfers & operational costs which further lead to improving the financial efficiency.

Summary: Appointed date of 1st April 2008 Merger ratio of 1 share of RIL for every 16 shares of RPL RPL shares held by RIL to be cancelled. No fresh treasury stock created RIL to issue 6.92 crore shares to RPL shareholders 4.4% increase in equity base from Rs 1,574 crore shares to Rs 1,643 crore Promoter holding in RIL will reduce from 49% to 47% Indias largest ever merger RPL shareholders to get 1 share of RIL for every 16 shares of RPL RILs holding in RPL to be cancelled. No fresh treasury stock created RIL to be among top 10 private sector refining company globally RIL to be among the worlds largest producer of Ultra Clean Fuels Merger to unlock greater efficiency from scale and synergies Merger to be EPS accretive; AAA rating reaffirmed by CRISIL

 RIL to have 3.7 million shareholders

Advisors:
Valuation Advisors Ernst & Young Pvt. Ltd. And Morgan Stanley India Co. Pvt. Ltd. Transaction Advisors J.M. Financial Services Pvt. Ltd. and Kotak Mahindra Capital Co Ltd. Fairness Opinion DSP Merrill Lynch Ltd. (for RIL) and Citigroup Global Markets India Pvt. Ltd (for RPL) Legal Advisor Amarchand & Mangaldas & Suresh A. Shroff & Co. Tax Advisor PriceWaterhouse and Coopers Pvt. Ltd.