Two months after the rift between the two siblings who control the $22.6 billion Reliance group became public in mid-November, the estranged brothers have not reached a settlement, fuelling speculation about an ownership split of one of India’s biggest business empires.
The board of Reliance Industries, the $17 billion group flagship with dominant interests in petrochemicals, and oil and gas refining and marketing, endorsed the leadership of Mukesh Ambani, the older brother and Reliance chairman and managing director, at a meeting on December 27.
The board also approved the buyback of the company’s stock worth Rs29 billion ($690 million) at a price not exceeding Rs570 per share, representing 10% of the paid-up capital and free reserves of the company.
The younger sibling, Anil Ambani, who is vice-chairman and also a managing director of RIL, abstained from the vote, aimed at shoring up confidence among minority shareholders.
A company release points out that the maximum buyback price is at a premium of 11% over the average one-year trading price range and is expected to improve the earnings per share and return on net worth of the company.
Unlike in a fixed-price tender offer where the company must buy all shares tendered, under the Reliance buyback the company has the option but not an obligation to buy shares in the secondary market. The company has the option to pick up shares when the market price of RIL’s shares falls to or below the maximum buyback price, the fair value price according to the company’s management.
The buyback period announced is from January 10 to December 26. RIL’s share price has largely traded below Rs570 and, until January 21, the company had bought back 2.6 million shares at an average price of Rs522 and a total cost of Rs1.4 billion ($32 million). Bankers to the buyback are DSP Merrill Lynch and JM Morgan Stanley.
Indian rating agency Crisil, an affiliate of Standard & Poor’s, said that after the share buyback, the company’s ratio of total debt to net worth could rise to 0.62 from 0.57 but that it would not have ?material impact on the company’s financial risk profile?.
The market capitalization of RIL, Rs714 billion on January 18 or 11% weight in the 30-share benchmark Sensex of the Bombay Stock Exchange, makes it a stock that is held in the portfolios of most foreign institutional investors registered in India.
These foreign institutional investors ? prominent among them are Government of Singapore, Merrill Lynch, HSBC Global Investment Funds and Goldman Sachs ? own 23% of RIL’s shares while another 7% is owned by foreign investors in global depositary receipts. This takes the foreign holding to 30%.
Board disruptions
To what extent the ownership dispute is likely to affect management of the group companies is uncertain but two directors on the board of Reliance Energy, a company managed by younger brother Anil, have resigned and Anil himself has resigned from the board of Indian Petrochemical Corporation, another group company.
In addition, corporate governance issues have surfaced related to RIL’s investments in group companies, notably the $2.75 billion investment in Reliance Infocomm, the unlisted telecoms subsidiary that is India’s largest mobile services provider.
?Institutional investors would be concerned if the ownership dispute dragged on too long and took too much management time. So far they do not see much impact on the cashflows of the companies,? points out one foreign banker. On January 21, RIL reported a 52% rise in profits in the quarter ended December 2004; other Reliance group companies have also posted healthy growth in profits.
Reliance is one of the youngest of India’s family-controlled business empires, built by Dhirubhai Ambani in India’s control-ridden regime of the 1970s and 1980s. Family ownership vests in a complex maze of 30-odd investment companies that could make a division, if it were to happen, messy. Reports say that K V Kamath, the head of ICICI Bank, India’s largest private sector bank, is working with the family to arrive at a settlement.
Meanwhile, the ownership spat has not hindered the Reliance group companies from raising foreign currency debt. Standard & Poor’s reaffirmed RIL’s BB positive foreign currency rating in December and in mid-January it was in the market to raise a $350 million syndicated loan.
A banker from a European bank that is arranging the transaction appears confident that the five-year bullet loan will be priced lower than a similar loan raised by the company in March last year.
On December 21 2004, export credit agencies of Germany and Italy signed up to a e116 million financing facility with RIL against the import of equipment for its polyester plant.
The 11-year back-to-back maturity ECA facility, arranged by Deutsche Bank, is the longest-tenor financing raised by the company in the past eight years.
Soon after, US Exim Bank and Export Development Canada signed up to $500 million and $250 million facilities respectively with Reliance Infocomm. The 10-year loans, arranged by Citigroup, will help finance the expansion of mobile services as well as the rollout of broadband services. This marked the last tranche of the $2.2 billion debt raised by the company.
