The merger of Reliance Industries (RIL) and Reliance Petroleum (RPL) is likely to be earnings per share (EPS) accretive for RIL shareholders by 50 to 150 basis points, analysts have said.

The swap ratio of 1:16 represents a 3.5% premium to RPL’s share price on Friday (Rs 76.20 per share).

RIL bought back Chevron’s stake of 5% in RPL @Rs 60 —- the same price at which it was sold by RIL in 2007, giving promoters complete control of India’s largest private company —- not that Mukesh Ambani was particularly seeking it.

The swap ratio was more or less in line with street expectations, though it tilts a touch towards RPL shareholders.

What bugs, however, is that the effective date of merger is retrospective —- from April 1, 2008, which raises questions about the basis of calculating book value (RPL’s remains flat around Rs 30 since April 1, 2008, while RIL’s has risen by Rs 150 to Rs 680 levels). But what happened in the period? RIL has built assets while RPL hasn’t done much —- the refinery started operating only late in 2008.

Be that as it may, RIL’s balance sheet as on March 31, 2009, will be a merged one. The company might also consider restating its numbers, analysts say.

RIL will extinguish treasury stock and issue 6.92 crore new shares to existing RPL investors resulting in a net increase of 4.4% in RIL’s equity base.

On synergies, operationally they would be minimal, say experts. This is because RIL shares the same management and facilities.

Nonetheless, the merger means that two of world’s largest and complex refineries with a crude processing capacity of 1.24 million barrels per day would come together to create the largest refining capacity in one place, and there is no fear of cannibalising each other.

It also engenders economies of scale, a big stick that can be used to improve crude sourcing and export margins.

But, the flipside to that is Chinese giants PetroChina and Sinopec are adding refining capacities in excess of 2 million barrels per day. It’s a gigantic plan, and can only complicate the netback nightmare.

RIL maintains that RPL would continue avail of tax benefits that it was entitled earlier. But the RIL would not be eligible for depreciation tax shield enjoyed by RPL. More importantly, the merger would give access to RPL’s annual cash flows, which are estimated at $1.5-$1.8 billion after complete ramp up. Also, the dividend distribution tax that RPL would have paid for payouts to RIL stands eliminated, thereby improving tax efficiencies.

So a strengthening of RIL’s financials and lowering of cost of capital is a given.

Analysts Somshankar Sinha and Vikash Jain of CLSA Asia-Pacific Markets wrote in a note that consolidated profits would rise by 5-6% in FY2010-11 in their report on March 1, 2009.

Analysts expect both the shares to trade in keeping with the swap ratio. Post announcement on Monday, RIL’s share fell by 3.15% to Rs 1,225.15 per share and RPL by 1.38% to Rs 75.15 per share. That they fell thusly on a day when the Sensex fell by 3.2% underscores the way the swap has swung.

Pallavi Pengonda/ DNA-Daily News & Analysis Source: 3D Syndication