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Why Ambani’s deal with Aramco failed?

In what could have been a very beneficial agreement for the Mukesh Ambani led Reliance Industries (RIL), which is, the sale of a minority stake in its refinery business, to the world’s largest company, Saudi Aramco, has stalled.

The deal hit a roadblock over valuation differences, and the fact that Aramco has cited concerns over RIL’s intention to transfer some of its debt to the refinery business ahead of the transaction.

Beneficial because, if this deal went through, the proceeds of the transaction would go a long way in helping RIL reduce its massive debt that has ballooned to about $ 42 billion as of June 30th, which is about ₹ 2.88 trillion.

In April of this year, when the proposed transaction between the two oil producing giants was first made public, the deal was expected to be structured this way.

Reliance, from its entire oil and gas business, would carve out its downstream refining and petrochemical business into a separate entity, which was expected to be valued somewhere between $ 55 – 60 billion (roughly ₹ 4,20,000 crores). Revenue wise as well, the downstream business contributes the lion’s share to Reliance’s entire oil and gas business.

 Aramco was reportedly negotiating for a 25% stake in this standalone downstream vertical for around $ 10 – 15 billion (roughly ₹ 1,05,000 crores taking the upper end).

 

Reliance, in the previous two of years, has been making an effort to minimize its investments in the oil and gas business and concentrate on its retail and telecom businesses, which provide it with a much higher profit margin. However, in doing so, it has made massive investments, and in the bargain accumulated massive amounts of debt. To pare some of this debt, RIL has been selling assets.

Last week it entered into an agreement with Brookfield Asset Management to sell stake in an investment trust that manages mobile phone and fibre assets for ₹ 25,000 crores. Earlier this year, the same firm, Brookfield, agreed to purchase the East West Pipeline from Reliance for ₹ 13,000 crores. Therefore, if RIL managed to monetise part of its refinery business, it would have breathed a sigh a relief. Also, this would be its biggest sale as yet, with proceeds in excess of ₹ 1 trillion expected.

However, the sticking point was valuation. While Aramco may have settled for $ 60 billion as mentioned earlier, Reliance may have been looking for a more attractive valuation, somewhere in the range of $ 70 billion. In the past, a number of brokerage houses have valued the downstream oil and gas business of RIL at close to $ 70 billion. Besides, even the transfer of debt to a special purpose vehicle (SPV) before the transaction was to take place, proved to be a damper.

However, Reliance is said to be working on an alternative plan and negotiations could still resume and lead to a compromise in the coming months.

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