In what could shape up to be a mega deal between two corporate behemoths, Saudi Aramco, the world’s most profitable company in history, is contemplating to acquire a stake of 25% in the refining and petrochemical businesses of Reliance Industries Ltd, India’s largest company.
Talks between the two oil producing giants was said to have gathered momentum after the visit of Saudi Crown Prince Mohammed Bin Salman’s visit to India in February, during which he met Reliance Industries’ Chairman, Mukesh Ambani.
Aramco is said to be interested in acquiring RIL’s downstream refining and petrochemical businesses. How the deal is expected to be structured is like this. Reliance, from its entire oil and gas business, would carve out its downstream refining and petrochemical businesses into a separate entity, which is expected to be valued somewhere between 55 – 60 Billion $ (roughly 4,20,000 crore ₹). Revenue wise too, the downstream businesses contribute the largest share of revenues to Reliance’s entire oil and gas business.
Aramco is looking to purchase a 25% stake in this standalone downstream vertical for around 10 – 15 Billion $ (roughly ₹ 1,05,000 crore). Reliance Industries has grown too big – from energy to retail to telecom and has in the bargain accumulated a lot of debt, the consolidated figure being in excess of 1,80,000 crore ₹. Therefore, it would make sense to sell some of its verticals, which will help reduce debt and free up resources for the group’s consumer businesses, which enjoy far higher valuation multiples.
However, valuation seems to sticking point, as Reliance may want a higher valuation than the 60 Billion that Aramco is looking to settle at. A number of brokerage houses have valued the downstream businesses of RIL at an average of 70 Billion $. At today’s share price of 1,380 ₹ per share, Reliance has a market capitalization slightly in excess of 125 Billion $ (i.e. ₹ 8,75,000 crore).
If one does a comparison, Saudi Aramco, the world’s largest oil producer and most profitable company, dwarfs India’s largest company, Reliance Industries on every front including refining capacity, revenue and net profit.
India is the world’s third largest consumer of crude oil after the US and China with daily use topping 4 million barrels per day, and with an increasing usage predicted in the future, it would be prudent for Reliance to team up with Aramco in the hopes to procure crude oil from the world’s largest producer at discounted rates.
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