The biggest private company in India, Reliance, came out with a major update regarding its future. The Mukesh Ambani led organisation announced that it has begun the process to move its oil-to-chemicals (O2C) business into an independent subsidiary. Currently, we know Reliance as the telecom market leader with the aid of Jio. But, Reliance’s core business remains to be in the oil and refinery sector.
With this announcement, the company will shift all of its refining, marketing and petrochemical assets to the O2C subsidiary. As of now, Reliance will retain 100% management control in this new subsidiary but we believe that soon this percentage will dropdown. Another big news from their house is that this new subsidiary will get a $25 billion loan from the parent company. This will be an interest-bearing loan that will be paid by the O2C subsidiary to the parent company. This is a normal practice in the world of finance and business. You can imagine it as something like getting a loan from your father with a promise to pay it back after a few years.
The importance of O2C business often undermined because of the rapid rise of Jio Platforms and Reliance Retail. But just for the perspective, 60% of Reliance’s revenue last fiscal year came from its O2C business. To understand more about how Reliance can generate its numbers, click here.
Imminent stake sale of O2C business
Last year, they amassed $27 billion from global investors like Google, Facebook and many others by selling stakes in their subsidiaries. Currently, Reliance holds an 85.1% stake in Reliance Retail and a 67.3% stake in Jio Platforms. With the advent of a new subsidiary, we can expect a possible stake sale in the new O2C subsidiary. The market believes that one of the most possible reason behind this hiving off is to attract investments from other companies. One such organisation which is reported to buy 20% stake in Reliance O2C business is Saudi Aramco.
Saudi Aramco is a Saudi Arabian public petroleum and natural gas company. It is one of the biggest companies in the world and the biggest company in the oil business. If Reliance can bring Saudi Aramco to their table, it will be a huge boost for their O2C business operations.
Mergers & acquisitions, demergers, investments, etc are very complicated deals. Months of due diligence is required before the conclusion of any such deal. It was in 2019 when for the first time the market heard the rumours of Saudi Aramco investing in Reliance. But due to the Covid-19 pandemic last year, this deal stalled off and since the start of the year, we didn’t hear much about it.
Now, with this mega move, we believe that a deal with Saudi Aramco might be wrapped soon. As said earlier, having a global player on your table will help you massively. Saudi Aramco, being the biggest company in this domain, will share their expertise and generate benefits from the second-highest populated country in the world.
The O2C business includes a 51:49 joint venture with British Petroleum (BP) in Reliance BP Mobility. Currently, Reliance holds around 1,400 outlets but plan it to expand to 5,500 retail outlets in the next five years.
A New Look for Reliance?
We have reported earlier as well that Mukesh Ambani wants his organisation to lead India’s fight to clean energy. In September 2020, he said, “We are working towards the transformation of energy. And we think again that the world is right and India is in the right mindset to completely, in the next few decades, move away from fossil fuels to completely renewable energy.”
By turning O2C into a separate subsidiary, Reliance will have more space to focus on green and clean energy. This hiving off will not dilute Reliance’s earnings or restrict their cash flows. In their presentation, the company also stated that it will accelerate hydrogen production and invest in carbon capture. Thus, aiming to convert carbon dioxide into products and chemicals which can be valuable for them and society.
Let’s see how this internal reorganisation will play for the company in the near future. But, as of now, we think that this might turn to be another positive decision from Mukesh Ambani & company.