Reliance Power’s merger with RNRL will mean little to either companies. It also underlines how wrong the market can be about a stock’s value
Reliance Natural Resources (RNRL) stock plummeted 17% on Monday to Rs 46.4, from the previous day's closing price following what seemed to the market an unfavourable share-swap ratio in its merger with Reliance Power. An episode like this underlines how markets can be hugely wrong for a long stretch of time. RNRL has been trading at around Rs70 for the past few months. At its height in 8 June 2008, it traded at a price as high as Rs245. All this while RNRL has been a shell company with virtually no business, except some claimed prospects in coal-bed methane. Investors and punters were hoping that it would trade in gas and make huge money through what economists call rent-seeking. It was supposed to buy gas from Reliance and sell it to the gas-based power plants of Anil Dhirubhai Ambani Group. ADAG also showed a vague pretence to get into other resource businesses. One was cement for which it hired Anil Singhvi, former managing director of Ambuja Cement. But this was dropped after a year or so. Now comes the merger with Reliance Power which finally underlines that RNRL has no future on its own. It was born a shell and died a shell.
On Friday, the boards of RNRL and Reliance Power approved a merger. KPMG valued RNRL at Rs 7,157 crore, leading to a share-swap ratio of 4:1. The market expected a share-swap ratio of 3:1 based on the trading price of the two stocks.
RNRL had closed on Friday at Rs63.65 while Reliance Power was at Rs175.15. It was ridiculous for the market to value RNRL so highly in the first place. What begs the question is what does RNRL have by way of assets and revenues that it was valued at over Rs7,000 crore? On the other hand, didn't Reliance Power make India's largest and most-hyped public issue in January 2008 when it was a shell company but instantly entered all the major market indices and also the derivatives segment? The two are of a kind. Subsequently, Reliance Energy's power assets were shifted to Reliance Power to add some assets. Now RNRL gets erased.
The merger was the only way out for ADAG to allocate gas to Reliance Power as the government's gas-utilisation policy does not give priority to a gas-trading company like RNRL but to only actual gas users like power and fertiliser companies.
This was again affirmed by the Supreme Court of India in May this year stating that the government has the right and power to set up the price and users for gas. This supposedly left no or little opportunity for RNRL which was set up five years before with the only purpose of procuring gas for Reliance Power.
The merger has salvaged RNRL at the expense of the shareholders of Reliance Power which plans to set up a huge 37,000MW capacity out of which 10,000MW of power will supposedly be generated from gas. The company is talking of setting up seven coal-fired power plants, two gas-fired units and seven hydroelectric projects.
The official reason for valuing RNRL so highly is that it has coal bed methane blocks with estimated resources of 193 billion cubic meters and an oil & gas block (RNRL holds 10% stake) with acreage of 3,619 sq km and reserve potential of up to 28 billion cubic metres. All these are currently estimates and ADAG's projections and estimates have proved to be notoriously fickle. The merger carries no synergy and erases another iffy chapter of ADAG companies. — Moneylife Digital Team