It is generally smarter to buy a company after it has gone bust, than before. In June 2004 Reliance Industries spent €80m on Trevira of Bavaria, only to see the polyester producer collapse exactly five years later. Now India’s largest conglomerate is preparing to crack the US by making an offer for Rotterdam-headquartered LyondellBasell, already mired in Chapter 11 proceedings.
The move makes a lot of sense – and not just because Lyondell is on its knees. For a company with $34bn in revenues, Reliance is remarkably undiversified; just 3 per cent of its assets are outside India. Adding Lyondell’s US and European portfolio, spread evenly over fuels, chemicals and plastics, would add substance to chairman Mukesh Ambani’s vision of creating a global, integrated major in materials and energy. Meeting a rumoured enterprise value of about $12bn, meanwhile, would be no great stretch. Taking on $6.5bn of debtor-in-possession financing would increase next year’s net debt to earnings before interest, tax, depreciation and amortisation from 1.1 times to 1.4 times, on Citigroup estimates. Reliance could then pay $5.5bn for the equity by using some of its $4.2bn cash-on-hand, or by selling some of its $8bn in treasury stock.
But it won’t be a steal. 25,000 creditors, holding about $22bn of “liabilities subject to compromise,” will push hard, whether or not they’ve written off what they’re owed. Under a restructuring plan presented in September, senior lenders would have taken control of the group in exchange for cancelling much of that debt; they’ll want to see a proposal that is distinctly superior. Chinese bidders, hitherto focused on wells rather than refineries, might thicken the plot too.
Last month Mr Ambani docked his pay by two thirds to “set a personal example of moderation.” Very admirable. But restraint is not what is needed now.
Source: http://www.ft.com/cms/s/3/efc95f5a-d810-11de-8b04-00144feabdc0.html?ftcamp=rss
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