MUMBAI: Should one take a long-term bet on Reliance Industries shares or punt on Reliance Petroleum shares for arbitrage opportunities that may be available till the record date is announced? That is the question that Dalal Street players were asking each other after the two companies informed the stock exchanges, post market hours, that they were considering a merger proposal.

While the swap ratio is yet to be announced, it is widely felt that the ratio will be in favour of RIL shareholders. This is based on the simple arithmetic that there are more minority shareholders in RIL than in Reliance Petroleum.
Independent investment advisor SP Tulsian feels the merger is “slightly negative” for RPL while only “mildly positive” for Reliance Industries.

“I think the swap ratio would be around 20:1 or 24:1,” he adds. Mr Tulsian expects RPL shares to drop to around Rs 70 on Monday. On Friday, RPL shares closed 1.2% lower at Rs 76.20. The shares have fallen 5% over the past one month. Some brokers say the timing of the proposal also indicates that RIL shareholders’ interests have been given priority.

“Had the merger been proposed when RPL shares were near their record highs, the merger ratio would have been 10:1 or 12:1,” (RIL share price was around 10 times the RPL share price at that point) said a fund manager who did not wish to be named.

Life Insurance Corporation and Fidelity Shares are the major institutional investors in Reliance Petroleum, holding 2.06% and 1.67%, respectively.

In a similar context, KRIS director Arun Kejriwal says that RIL would “benefit more” from the swap ratio as it is a “longstanding company and has large reserves.”

“One needs to keep in mind that RIL is also the holding company for other Mukesh Ambani entities,” he adds.
Some analysts feel the merger proposal may be the first of a series of restructuring moves likely in the Reliance group.
“Going ahead, we expect the company to be demerged into two separate businesses — one that has exploration and oil & gas business and the other that runs refining business. We are expecting a total restructuring of Reliance’s business,” said Networth Stock Broking’s research head Deepak Sawhney.

However, there are some who feel that it is difficult to conclude whether RIL or RPL shareholders would benefit more from the merger. “In case of the RIL-RPL merger (in 2002), RIL shareholders benefited, while in RIL-IPCL merger, IPCL shareholders got a better deal,” says Antique Stock Broking oil analyst Amit Rustagi. “But, given that RPL’s shares have fallen sharper than RIL in the past 12 months, we feel that RPL shareholders could get a better ratio than the one based on today’s (Friday) closing price (16.7:1),” he adds.

A few analysts had come out with bearish recommendations on the Reliance Petroleum stock recently. “We have a ‘sell’ rating on pure refiner RPL, owing to our negative outlook on refining margins in the medium term and on gasoline spreads in the near term. We believe the rally in the stock on the back of recent strength of gasoline spreads offers an opportunity to take profits,” brokerage house Goldman Sachs said in its report last week.

But the buzz in the market that RIL stands to gain from the tax exemption that RPL enjoys for the next 10 years. “The tax breaks enjoyed by any subsidiary would get transferred to the parent once the books are consolidated,” said another analyst who wished not to be named.

source: Economictimes

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