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Monday, November 23, 2009

Why LyondellBasell is a goldmine for RIL

Mon, Nov 23, 2009

After bankrupt petchem giant LyondellBasell (LB) confirmed it had received a preliminary non-binding offer from India’s Reliance Industries (RIL) to acquire for cash a controlling interest in the company. CNBC-TV18’s Gautam Broker tracks the deal and analyses how it impacts both companies.

The one thing that catches attention is that LB is not new to RIL. The Dutch giant already is Reliance’s technology partner for poly-propelene and High Density Polyethylene (HDPE).

How RIL, Lyondell stack up

RIL today is the world’s seventh largest producer of polypropelene while LB is its largest producer. Thus, if the deal goes through, RIL would have a global monopoly in polypropelene. LB's product portfolio also complements that of RIL’s — the former is a large producer of oxy fuels and polyethelene while the latter leads in producing paraxylene, purified terephthalic acid (PTA) and monoethylenglycol (MEG). The Mukesh Ambani company would thus have strength across a diversified portfolio.

The deal would also help RIL consolidate its petro-chemical business. LB has many pet-chem facilities in the Middle East — going on-stream from December — that use ethane as feedstock secured at long-term supply contracts of USD 1.2-1.4 per mmbtu. RIL, on the other hand, uses naptha as feedstock, which is much costlier.

More global presence

RIL would also gain by getting to increase its limited global presence — it currently has trading desks in Singapore, Rotterdam, Dubai but little distribution presence.

Also, RIL would, via the deal, have a manufacturing edge by having several facilities. RIL currently has most of its 14 facilities concentrated in Maharashtra and Gujarat states of India while LB has 50 manufacturing facilities in 19 countries.

RIL can also use some of LB’s sites as storage facilities — something it has been scouting for since long.

RIL had been eyeing Basell (before LB came into existence) since quite some time before it was taken over by Access Industries. Valuation-wise, LB is much bigger and comes much cheaper than in the past and with idle cash and low leverage and debt, RIL is in a good position to move in for the kill.

Other bidders to line up?

Sources say other private equity players such as Apollo and KKR have made offers to LB though they are equity financing proposal to sponsor the company’s rights issue, and not a cash offer like RIL’s.

Even though big by India standards, RIL is not in the same league as US’ Dow Chemicals. Thus, a bid to buy out LB would not invite governments' concerns on creation of a monopoly in the global market.

Also, RIL, which has about USD 12 billion in cash (about the same amount as that of the deal) is not expected to use the entire amount to pick up stake in LB. It is learnt that the deal would have a 40% cash infusion while 60% would be raised via debt.

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