RNRL-Rel Power merger to smoothen gas routing

The boards of Anil Dhirubhai Ambani Group (ADAG) companies —Reliance Power Limited (R-Power) and Reliance Natural Resources Limited (RNRL)—on Sunday approved the merger of the two companies in an over Rs 50,000 crore ($11 billion) stock deal, subject to necessary approvals. The merger will facilitate the routing of gas from Mukesh Ambani’s Reliance Industries (RIL) to R-Power for fuelling its power plants, including the one proposed at Dadri. RNRL has gas supply master agreements with RIL, and the merger will lead to “accelerated implementation of Reliance Power’s plans for setting up over 8,000 mw of gas-based power generation capacity,” a company release said.

The boards approved an exchange ratio of one share of R-Power for every four shares of RNRL. The exchange ratio is based on the valuation made by KPMG, the release added. “The merger will expedite the gas allocation process for Reliance Power from the government which is the positive for its power generation,” said stock market commentator SP Tulsian..However, he is of the view that the swap ratio should have been 5:1, since RNRL originally was a shell company. “RNRL has a book value of close to Rs 12 and Rel Power, close to Rs 60. This ratio (4:1) is value destructive for RNRL shareholders,” he said.

RNRL was formed with the intention of sourcing, supplying and transporting gas, coal and liquid fuels, but lost much of its relevance without any surety of supply of gas as per the family agreement between the Ambani brothers. In fact, there was much speculation that Mukesh would try to acquire RNRL from Anil, as a backward integration move.