What does Reliance hiving off its O2C business really mean?

Reliance Industries expects that the actual process of carving out the oil-to-chemicals (O2C) business into an independent subsidiary would be completed by the second quarter of FY22 which will be around September 2021.

Feb 24, 2021 07:02 IST India Infoline News Service

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Last month, Reliance Industries had announced that it would officially hive off its Oil to Chemicals (O2C) business into a separate entity. This has been in the works for some time and on 22 February, RIL announced that they had commenced the process of hiving off the O2C businesses in terms of actual execution. What does this separation of O2C business mean and why is it important for RIL?

What does hiving-off O2C business really mean?

Reliance Industries expects that the actual process of carving out the oil-to-chemicals (O2C) business into an independent subsidiary would be completed by the second quarter of FY22 which will be around September 2021. This will be the first step by RIL to sell a 20% stake in Reliance O2C Ltd to an external investor to realize the SOTP valuation of RIL in the best way possible. It may be recollected that these discussions had almost concluded with Saudi Aramco for a $75 billion valuation of the O2C business in 2019. However, it was delayed due to the pandemic and the subsequent fall in crude oil prices.
Here are some of the highlights of the proposed new structure of Reliance O2C Ltd.
  1. Reliance O2C Ltd, the newly-formed company, will be a 100% owned subsidiary of Reliance Industries.
  2. There will be no change in the shareholding structure as the promoters will continue to own 49.14%, Indian public 12.54% and FPIs 24.49%. The balance 13.83% will be owned by other shareholders.
  3. Reliance O2C Ltd will essentially house the oil refining and petrochemicals business of the Reliance Group, but exclude oil and gas extraction. The upstream extraction, including the KG-D6 basin, will continue to rest with Reliance Industries.
  4. Reliance O2C Ltd will hold 51% in their oil marketing venture, Reliance BP Mobility, with British Petroleum holding the balance 49%. Reliance O2C will also hold 74.9% in Reliance Sibur Elastomers and the entire 100% in Reliance Global Energy Services Singapore, Reliance Global Energy Services UK and Reliance Ethane Pipeline Ltd.
  5. Post the ownership reorganization, management control of Reliance O2C will still rest with RIL. There will be no dilution of earnings or any restriction on cash flows.
  6. The NCLT filing has been done on 03-Feb and RIL will conduct the creditor meetings in Q1FY22. The NCLT approvals for the reorganization are expected by Q2FY22.
  7. All other business that are currently under RIL and not mentioned above under the header of Reliance O2C, will continue to be under the RIL banner.
That brings us to the critical question; what is the logic for hiving off the O2C business into a separate entity? There are essentially two drivers. Firstly, it allows RIL to ringfence assets and liabilities to talk to potential investors for a stake sale. Secondly, it will form the basis for positioning the O2C business as a green net zero-carbon venture.

Monetizing its holdings in Reliance O2C

In the previous year, Reliance Industries raised close to $33 billion (Rs250,000cr) by hiving off stakes in Jio Platforms and Reliance Retail. That had driven valuations of RIL to all-time highs. Over the last 10 years, the hefty cash flows from the refining and petchem business bankrolled the launch of Reliance Jio and its retail ventures. Both these businesses have stabilized and are now contributing significantly to EBITDA.

The time is ripe to realize good value for O2C business. In 2019, RIL had almost struck a deal with Saudi Aramco to sell 20% in the O2C business for $15 billion. The deal got stalled due to the pandemic and the oil price crash as valuations became the roadblock. This time around, RIL clearly wants to adopt the 2020 model.

Reliance learnt in 2020 that if you target a broader array of investors there were enough willing buyers for quality assets. Jio Platforms targeted strategic investors like Facebook and Google as well as PE investors. In case of Reliance Retail, the stake sale was only done to PE investors. In the O2C case, RIL wants a combination of PE investors and strategic investors without tying down the deal to one single partner. That also makes business sense.

Time to look at the future of energy

The basic idea of reorganizing O2C was best captured in the statement put out by RIL. The reorganisation will "drive the move towards further downstream and closer to customers" and also "provide sustainable and affordable energy and materials solutions to meet India's growing needs". The second part is the focus on new energy solutions. Reliance realizes that like in digital and retail, it needs to think ahead of the curve to be able to make an impact. With fossil fuels likely to be under strain, the time to diversify is now. New energy is likely to be the focus of Reliance O2C, but for that we will have to await more granular details.

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