Sorry to have pulled you out on your holiday." The courtesies over, Anil Ambani, managing director of Reliance Industries Ltd (RIL), proceeded to tell over 100 bleary-eyed reporters and analysts on March 3 that India's largest private-sector company had just been formed. With a turnover of Rs 59,572 crore (2000-1) and 35 lakh shareholders, the merged Reliance Petroleum Ltd (RPL) and RIL is India's first private company to rank among the Fortune Global 500.

But intrigue and the Ambanis go hand in hand. In this case, more than the merger, it's the timing that has generated a bigger buzz. That the Ambanis would merge the Rs 31,182 crore RPL and the Rs 28,390 crore RIL to create an integrated energy company was expected, given the synergies between the two companies. All global energy giants, from Shell to Exxon Mobil, are vertically integrated-they own the entire chain of the oil business, from refinery to production to distribution and sales. "The merger lends RIL the kind of integration global oil majors have," says Mukesh Bhutani, partner (oil and gas) with Arthur Andersen.

The big question then was not what, but when. The intent to merge was announced on March 1, a day after the Union budget, which had made it clear that the administered price mechanism for the oil industry would be dismantled from April 1, lifting most price and distribution controls on the companies. Refineries like RPL, which handles 25 per cent of the oil refined in India, would then need outlets to sell their products.

"Setting up a marketing network would cost the Ambanis at least Rs 5,000 crore and could take up to four years to achieve critical mass. What is now clear is that the Ambanis need HPCL or BPCL-the two PSUs up for sale," says an analyst. While HPCL has about 4,600 retail outlets, BPCL controls about 4,500. "The merger is aimed at ensuring that a combined balance sheet is put into place to ensure that they can put big bucks on the table when the Government sells HPCL and BPCL," he adds.

At current stock prices, any one of the two oil PSUs could cost the buyer (the Government stake and the subsequent open offer) an estimated Rs 7,000 crore. The figure may be higher if an aggressive bidder (like IOC) enters the fray. Besides, global giants like Exxon-Mobil, Royal Dutch-Shell and Chevron are also eyeing the Indian market.

RIL is also angling for a stake in the Enron-controlled Dabhol Power Company (DPC) for its gas assets, while power utility BSEs, in which RIL owns more than 30 per cent, is keen on DPC's power plants. Reliance has plans to expand its operations to overseas markets too. All this would, of course, require big bucks.

THE ECONOMY

MERGER'S SWOT ANALYSIS STRENGTHS: Stronger financial position. Can raise Rs 11,000 crore in debt to fund acquisitions. WEAKNESSES: Does not have a retail network. Must acquire oil PSUs like HPCL or BPCL. OPPORTUNITIES: Second-largest Indian company could expand its oil and telecom businesses in the next couple of years. THREATS: Requires large sums of money to fund its energy and telecom businesses. Its rivals are cash-rich global giants.

The company claims that it can raise up to Rs 11,000 crore debt without diluting its equity because of RIL's favourable debt-equity ratio. RIL also has a better credit rating and a greater FII holding than RPL. RIL's cost of raising new debt will be 0.5-1 percentage points lower than what it would have cost RPL. The Ambanis' attempt to sell a part of their stake in RPL through a global issue last year did not take off.

Then, there are large benefits in sales tax because an estimated 25 per cent of RPL's output was sold to RIL. Analysts also point to the other benefits in direct and indirect taxes (like depreciation costs of RPL's Jamnagar refinery) that are yet to be quantified. So, while the primary reasons for the merger may have been strategic, benefits from financial reengineering too would be substantial.

The masterstroke is probably that wholly-owned subsidiaries and affiliate companies of RIL, which collectively held 36 per cent in RPL, will have a 12 per cent stake in the post-merger entity. RIL, which held another 28 per cent in RPL, will have to liquidate its stake because Indian laws do not allow a company to own its shares. These shares, valued at almost Rs 5,000 crore-and a potential to raise another Rs 5,000 crore in debt-would be used for striking alliances (by giving a small stake to potential partners) or funding acquisitions.

THE ECONOMY

AMBANISPEAK >Anil ambani, MD, RIL "RIL's increased size will impart it greater financial strength for investment and/or acquisitions." >"HPCL and BPCL opportunities will be evaluated on the basis of return on investments and enhancing shareholder value." >"RPL shareholders stand to benefit by participating in the growth of the merged entity." >"RIL is already facing global competition in all its major products. The petroleum sector won't be different." >"It is our endeavour to maximise shareholder value."

The Ambanis have also embarked on a massive telecom project-Reliance Infocom-which aims to wire up the entire country through broadband and then offer a slew of data and voice services. The project, in which RIL owns 45 per cent, will need Rs 25,000 crore over the next few years. Ambani, however, denies that the merger will be used to fund the telecom project. "The funds for the telecom project have been tied up. The merger has nothing to do with it," he says.

But while Ambani claims that the merger is good for RIL shareholders-they get assets worth Rs 21,000 crore by issuing shares worth Rs 11,000 crore-the swap ratio of 11 RPL shares for one RIL share has not gone down too well with the stock markets. The closing price for RPL's share on March 5 was 28.25 (Rs 310.75 for 11 shares) as against Rs 313.55 for one share of RIL. "Since it was an accepted fact that RPL shares were undervalued at Rs 28 why has this price been used to value the RPL share?" asks an analyst. In defence, Ambani says the valuation of the merger was done by global accounting firms and there was no reason to doubt the methodology.

Critics of Reliance also say that the group has maintained high profits in the past due to the protection from high import tariffs. A lower duty regime has now been signalled and RIL will be open to competition from both domestic and foreign players, some of whom already have a headstart in certain areas. In petroleum, ioc with Rs 1,11,419 crore in sales and 7,500 retail outlets, will be a formidable rival. Besides, there are global giants waiting in the wings. The advantage RIL will have over existing oil PSUs is its better integration and private-sector structure that allows nimble decision-making and low costs.

On March 3, the Reliance Group created India's biggest company by merging two companies in its fold. How the behemoth competes with other oil giants will determine the Ambanis journey from being the biggest to being the best.