Reliance aims big with $12 bln bid for LyondellBasell
Ranked by Forbes as India’s richest man with a net worth of $32 billion, Mukesh Ambani is no stranger to taking risks.
The move by conglomerate Reliance Industries, controlled by Ambani, to bid for bankrupt LyondellBasell is a calculated one. Markets seem to think this is a bargain and investors pushed up Reliance’s stock nearly 4 percent on Monday.
If the deal, which sources say may be worth $12 billion, goes through, it would catapult Reliance into the ranks of top petrochemical makers such as Saudi Arabia’s SABIC, Germany’s BASF and Dow Chemical Co.
The bid comes at a time when asset prices have fallen globally in the wake of the economic crisis but there are still some lingering doubts over whether the worst is over for the global economy.
Reliance hasn’t shied away from making mega investments during downturns.
Last December, Reliance commissioned a 580,000 barrels per day refinery next to its existing 660,00 bpd plant in the western Indian state of Gujarat, creating the world’s biggest oil refining complex just as global oil demand began to collapse.
Reliance has a cash pile of $4 billion and $8 billion in treasury stock that can be sold, so funding is unlikely to be an issue for the company, Macquarie said in a research note ahead of the bid. Bank of America Merrill Lynch is among the advisers for Reliance, sources said.
M&A: lessons from history
Two chunky bits of M&A research landed this week (both, incidentally, drawing on Thomson Reuters data).
Cass Business School’s recently established M&A Research Centre sounded a note of a caution about the merits of buying floundering companies, even if such deals are initially welcomed by the market.
“Companies who bought distressed or insolvent rivals over the past quarter-century suffered lower returns on equity and underperformed buyers of healthy firms, a study released on Monday showed…
‘Even though acquisitions of distressed firms are viewed as value-enhancing by the market — no doubt driven by low valuations — the integration process of a distressed target proves challenging for many acquirers,’ wrote the authors, led by Scott Moeller.” (Read the full Reuters story here.)
And JPMorgan looked at the changing face of M&A since 1990, drawing some intriguing contrasts between the current malaise and the bursting of the tech, media and telecoms (TMT) bubble at the start of the decade. JPM notes the dotcom years actually saw a larger M&A boom, relative to the size of the world economy, than the credit bubble:
“Looking back at the 1999-2000 peak, M&A as a percentage of GDP reached its upper limit after 7 years of continuous growth and stagnated for 2 years at 10% to finally collapse and return within 2 years to 4%. In contrast, between 2006 and 2007, whilst M&A was at an all time high level, the same ratio found a new upper limit at 8% and followed the same 2 year high-plateau pattern before suddenly collapsing with the credit crisis in 2008.” …
“Based on the hypothesis that the M&A/GDP pattern could repeat itself global activity as % of GDP could reach 3.6%, 3.7% & 4.5% in 2009, 2010 and 2011 respectively, mirroring the upturn of 2002, 2003 and 2004. When matched with IMF GDP forecast for the same years this could mean that M&A activity could return to slow growth as early as this year and next and eventually reach US$2,622bn by 2011.”
Heineken brews up loan-to-own deal
Distressed debt investors seek to pick out the diamonds in the rough, the good companies that can be turned around given a fair wind and the right management and capital structure.
These specialist investors buy up the debt of struggling companies aiming either to sell on the debt when the company recovers, or grab an equity stake if the company is forced to cut its borrowing via a debt-for-equity swap.
Stepping into this territory is Dutch brewer Heineken, which has bought up 49 percent of the debt of Globe Pub Company, a UK pub chain owned by property entrepreneur Robert Tchenguiz.
