Reliance Natural Resources to be merged with Reliance Power - Seen as strategy to comply with apex court order on natural gas supply

The ADAG group proposes to merge Reliance Natural Resources with Reliance Power.The boards of RNRL and RPower will meet on Sunday to consider the merger, both companies informed stock exchanges on Friday.The move is seen as a strategy to comply with the Government directive and the Supreme Court order on the supply of gas by Reliance Industries to RNRL. The new gas supply agreement signed between RIL and RNRL was submitted to the Bombay High Court earlier this week.According to analysts, since RNRL has no power project, it has to resell the gas to RPower. This could be construed as trading in gas. The best way to avoid this complication is to merge RNRL with RPower. Then, RPower projects can directly get gas from RIL.

RIL had earlier stated that as and when the power plants of ADAG are ready to receive gas, it would commence supplies to them, subject to the Government granting allocations to these plants.Reliance Power is developing 7,000 MW of gas-based capacity at various locations in India, including Dadri and Shahapur.

RNRL was formed in June 2005, following the de-merger of the Reliance Group, for the supply and transportation of gas from RIL's oil wells to Anil Ambani Group companies, including RPower.

“Now that the dispute between the brothers over gas pricing is over and they may not have the need of a separate entity for an intermediary company for gas supply. This is good in terms of consolidation of the group,” Ms Anita Gandhi, Whole-time Director Institutional Equity, Arihant Capital Markets, said.With the new agreement between Mr Mukesh Ambani and Mr Anil Ambani coming into effect, R-ADAG may not require a separate company for procuring gas from RIL, another analyst said.

ADAG had floated RPower with an ambitious plan of setting up 35,000 MW capacity and raised Rs 10,000 crore through an IPO two years ago. However, according to analysts, it would require at least Rs 150,000 crore for the capacity creation of this scale.

Merger ratio

The merger of two entities is good in terms of corporate governance and clarity, say analysts. The merger is expected to be a share swap deal.Mr Vinod Ohri, head of research at Gupta Equities said, “Going by book value, the share swap ratio should be in the range of four or five shares of RNRL for every one share of R Power. But market prices indicate a 3:1 swap ratio. We don't think they will announce the ratio immediately. They have just called for a board meeting to discuss this issue and we expect a valuer to be appointed and proper due diligence done prior to the actual announcement.”

Mr Arun Kejriwal of Kejriwal Research and Investment Services said that that R Power would not like to dilute its stake much. The swap ratio would just enable an exit route for RNRL investors and is expected to be in the ratio of 2.7 RNRL shares for every share of R Power.