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Is RNRL - Reliance Power merger on the cards?

Is RNRL - Reliance Power merger on the cards?


By SP Tulsian

For the past couple of days, market has been agog with speculation and rumours that Reliance Natural Resources Ltd. (RNRL) is likely to be merged with Reliance Power Ltd. (RPL). Market, as usual, has started viewing this news as a move to ramp up the share price of RPL, more especially, after the "no-effect" of bonus announcement on the share price of RPL, which closed at Rs.385 on 15th February 08, (prior to bonus announcement), and rose by just Rs.25 to close at Rs.410, on 20th February 08.



If the merger does indeed happen and we are asked to analyse it, there would then be two aspects to it - Synergy and Momentum.



Momentum cannot really work at this stage, as has been seen with the bonus announcement and hence even this news would prove to be a damp squib.



However, Synergy does have its role to play. RNRL came into existence, at the time of separation, between the Ambani brothers, mainly to secure the gas rights by Anil Ambani over the entitled and agreed quantity of gas, at the agreed price, to be produced by Reliance Industries Ltd. (RIL) at eastern cost mainly at Krishna Godavari Basin, for his power projects. This means, RNRL was brought in, as feedstock rights securing and procuring company for the power projects of Reliance ADAG.



RNRL has bagged some coal bed methane gas blocks, as also one on-shore oil exploration block and has applied for permission to lay a pipeline to carry gas from eastern coast to Dadri. RNRL has also been exploring to acquire coal mines and blocks in Australia, Africa and South East Asian countries, mainly to secure feed stock for its Ultra Mega Power Project at Krishnapattanam. Sasan Ultra Mega Power Project, has its own captive source, which is being implemented by RPL.



Earlier, Reliance ADAG had various companies, including Reliance Energy Ltd., to implement its various coal and gas based and hydro power project, which is now being implemented by RPL, a company which recently went public. Hence, it is logical and administratively convenient for the group to merge RNRL into RPL, as ultimately, the sole customer of RNRL would be RPL. Also, under agreement with RIL, RNRL is prohibited to trade in gas procured from RIL, which implies that there can't be any add up on the gas price, being supplied by RNRL to ultimate users of gas by Reliance ADAG companies. So how will RNRL show its financial performance, which would be nothing but a disappointment for its investors? This in itself makes it prudent and advisable to merge RNRL with RPL.



Also in the past, it was learnt that Reliance ADAG through RNRL has settled with RIL over gas dispute, under which RNRL would get transferred to RIL or Mukesh Ambani Group at a higher than its market price and net consideration received on such transfer, would get used, to pay higher gas price by Reliance ADAG to RIL. Earlier, agreed price of gas between them were $ 2.34 per mBtu, which was agreed to be raised to $ 4.00 per mBtu. Mind it, RNRL is just a shell company, with no earning business models, and still if it gets valued at over Rs.25,000 crore, that must be a quid pro quo.



Also, if one looks at it from the point of view of better control of the companies, merger of RNRL into RPL would always be in the larger interests of Reliance ADAG as it has about 54.84% stake in RNRL while it has 89.90% stake in RPL. Post merger and post bonus issue by RPL, still group can have an effective control of anywhere between 75% to 80% of merged entity. RNRL largely has intangible assets, except office premises of 95,000 sq. ft. at Reliance Centre, Ballard Estate, Mumbai.



Post RPL IPO, it may become difficult for the Reliance ADAG now even to please RNRL shareholders, who have entered into the stock, in the recent past at Rs.200 plus. The stock has seen a high of Rs.250 in the month of January 08. Though promoters of the company have no responsibility and obligations towards new investors, having bought shares of RNRL above Rs.200 per share, still, those investors look upon the promoters and some of them even held promoters guilty of a rampant price rise. So, everyone has reached to a conclusion that RNRL may not be able to see its share price crossing its previous top, in the recent times. Also, gas dispute with RIL is not likely to get resolved very soon, as expected earlier.



In nutshell, merger of RNRL with RPL may happen, as it would be synergistic and in the larger interests of the shareholders of both the companies. However, it would be a wishful thinking to presume that this move would inject fresh lease of life in RPL and take its share price northwards. How can an ant lift a mountain?