MUMBAI (Reuters) - Reliance Industries, India's largest listed firm, said it is to absorb its 70 percent-owned Reliance Petroleum unit through a share offer, creating the world's largest refining complex.
Combining operations will cut costs, Reliance said in a statement, adding the move would boost earnings from year one -- at a time when world crude oil prices have slumped 71 percent since hitting a record high last July.
Billionaire Mukesh Ambani's Reliance Industries will issue 1 share for every 16 held in the unit, or 69.2 million shares worth 87.5 billion rupees ($1.7 billion) at Friday's close.
"This merger is about size. We aimed to create a larger integrated energy major that can take on projects much larger than before," Chief Financial Officer Alok Agarwal told a news conference.
"Reliance gets a consolidated asset that is virtually ready at minimum project risk, while Reliance Petro shareholders get to participate in Reliance's upstream product portfolio."
Analysts said the move would boost Reliance's financial muscle.
"We expect the proposed merger to further enhance RIL's global scale of integrated production facilities and strong competitive position in petrochemicals and oil refining," Standard & Poor's said in a statement.
Although the company was exposed to higher debt and there was profit pressure due to a sharp downturn in commodities and oil refining, there was no immediate threat to Reliance's corporate credit rating, it said.
Reliance Petroleum commissioned its 580,000 bpd refinery in December, located next to Reliance Industries' 660,000 bpd refinery in Jamnagar on India's west coast.
The combined firm would have refining capacity of 1.24 million barrels per day (bpd), ranking it ahead of the previous biggest refinery, Venezuelan state-run PDVSA's Amuay/Cardon complex.
Shares in both companies fell on Monday, with Reliance Industries down more than 4 percent as the swap ratio gave a slight edge to Reliance Petroleum shareholders, traders said.
Reliance Industries said the move should boost its earnings potential without seriously diluting its capital.
Reliance said it would cancel the Reliance Petroleum shares it already owned on absorption. It is also buying Chevron Corp's 5 percent in Reliance Petroleum for 13.5 billion rupees ($261 million) at the original price of 60 rupees a share.
This would give Reliance the unit's new $6 billion refinery for a fraction of the price on its books, with its equity capital rising to 16.43 billion rupees from 15.73 billion. Reliance Petroleum's capital stands at 45 billion rupees, Thomson Reuters data showed.
The amalgamation will result in a 4 percent dilution at Reliance Industries that will be shared equally between founders and other shareholders, Agarwal said. The founders' stake will fall to 47 percent from 49 percent.
"It ensures the increase in equity is kept to the bare minimum to boost all ratios such as EPS and return on equity," Ambareesh Baliga, vice president at Karvy Stock Broking, said.
Analysts Niraj Mansingka and Ruchi Vora at Edelweiss Securities said in a research note that operational synergies were likely to come from optimising costs and being better able to negotiate crude oil buying.
"There could also be potential savings on dividend distribution tax," they said, adding Reliance would also benefit from a bigger balance sheet that would give it muscle to raise funds for expansion.
Reliance expects the amalgamation to close in 3-6 months.
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