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|21 April, 2019

Aramco sale would grease Mukesh Ambani's tidy-up

Saudi Aramco is in talks to buy a stake of at least 20% in the refining and petrochemicals businesses of India’s Reliance Industries

Mukesh Ambani, Chairman and Managing Director of Reliance Industries, arrives to address the company's annual general meeting in Mumbai, July 5, 2018.

Mukesh Ambani, Chairman and Managing Director of Reliance Industries, arrives to address the company's annual general meeting in Mumbai, July 5, 2018.

REUTERS/Francis Mascarenhas

MUMBAI (Reuters Breakingviews): Saudi Aramco can grease Mukesh Ambani’s tidy-up. The Middle Eastern oil giant is eyeing a stake in the petrochemicals and refining bit of the Indian tycoon’s $127 billion Reliance Industries. A deal would give Riyadh greater security over where it sells its oil, while allowing India’s largest publicly listed company to grow on all fronts without its leverage ballooning.

Ambani’s openness to selling some of his crown jewels reflects a balancing of priorities. Petrochemicals and refining are cash cows but also growth areas. The tycoon is planning a sizeable expansion at Jamnagar in western Gujarat, where Reliance already operates the world’s biggest refinery complex, and India needs to at least double capacity to meet domestic demand by 2040. Still, Ambani will also want to keep expanding his consumer-facing businesses, where payback is less certain, without hiking borrowings: net debt is already close to two times Reliance’s EBITDA.

If the Saudis pay a mooted $15 billion for a 25 percent stake in the energy operations, that would imply a valuation of $60 billion for the divisions combined. That's one-fifth less than the implied enterprise value of the unit based on a sum-of-the-parts analysis by brokerage IIFL, but looks more reasonable if the quoted figure is an equity value.

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Either way, that cash, and a separate potential $15 billion sale of Reliance’s fibre and telecom towers to a buyer like Canada’s Brookfield Asset Management, would allow Ambani to continue his courtship of the everyday Indian. His newish businesses already include the country’s biggest retailer and a telecom operator offering mobile data at dirt-cheap prices, and Ambani wants these “new age” businesses to grow from about one quarter of EBITDA at present to half the total by 2028. The tycoon has sunk billions into building the telecom network and may need to increase prices and invest in e-commerce to take on Jeff Bezos’ Amazon and Flipkart-owner Walmart.

Haggling is likely. Aramco’s deep pockets will encourage Ambani to hold out for a higher price for his prize assets, but the Saudis may resist knowing they will have little say in the business with a minority stake. Either way, the mutual benefit of doing a deal should be enough to get something over the line.

CONTEXT NEWS

  • Saudi Aramco, the world’s biggest oil producer, is in talks to buy a stake of at least 20 percent in the refining and petrochemicals businesses of India’s Reliance Industries, sources familiar with the matter told Reuters on April 17.
  • Aramco’s discussions with Reliance were for a roughly 20 percent stake, one source said, adding that the current thinking was to create an entity covering that part of Reliance’s refining, petrochemicals and marketing businesses.
  • If the deal went ahead, it could boost Aramco’s crude oil supply to Reliance by more than 50 percent, the source added. Another source said talks with Reliance were for a 25 percent stake.
  • “Reliance has offered an integrated deal - a stake in existing refineries and the planned 600,000 barrels per day (Jamnagar) refinery, along with petrochemical business,” the second source said.
  • The Times of India reported earlier that Aramco was in talks to buy a stake of up to 25 percent, which could be worth around $10 billion to $15 billion, valuing the Indian company’s refining and petrochemicals businesses at some $55 billion to $60 billion.
  • Reliance on April 18 said that net profit rose 9.8 percent to 103.6 billion rupees ($1.49 billion) in the three months to end-March from the same period a year earlier.
  • Reliance’s current market capitalisation is $127 billion.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by George Hay and Bob Cervi)

Our Standards:The Thomson Reuters Trust Principles.

© Reuters News 2019

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