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Ambani may pay $7 bn for Dow stake

Mukesh Ambani might end up paying an enterprise value of anything between $6-7 billion for getting a stake in the commodity plastics business of global petrochemicals giant Dow Chemical.

business Updated: Mar 17, 2007 14:18 IST

Mukesh Ambani might end up paying an enterprise value of anything between $6-7 billion (Rs 26,000-31,000 crore) for getting a stake in the commodity plastics business of global petrochemicals giant Dow Chemical.

Dow may spin off its basic plastics business into a joint venture with Ambani's flagship, the $20-billion Reliance Industries Limited (RIL), according to unconfirmed reports. When contacted, a Dow spokesperson said "it is not our policy to comment on speculation". However, the statement added that Dow is "continually looking at investment opportunities and potential ventures aroundthe world." RIL declined comment.

Dow Chemical has a market cap of $41 billion, and at $11.83 billion, the basic plastics business accounts for less than a quarter of Dow's turnover of $49 billion. Ambani's Reliance Industries Limited (RIL) is eyeing a strategic stake in Dow's plastics business.

Dow's market cap is 0.84 times its sales. As the commodity plastics business is a low-margin business, analysts say the valuation of this business should be lower than that of the whole company. By this logic, the value of this business should not be more than $6-7 billion, estimate analysts.

Analysts tracking the RIL stock , however, are not clear on how it would benefit by acquiring Dow' commodity plastics business, as it may find it difficult to cut costs. ''While Dow will benefit by transferring its low-margin business into JV, it's not clear how RIL will gain,'' said an analyst with an FII, who didn't wish to be identified.

''The success of the deal would depend on the ability of the JV partners to reduce costs. You can't possibly transfer the manufacturing facility to India. What will they do with the plants in the US? We have not been able to understand what the benefits, unless it gets the assets for a song,'' added the analyst.

The concern is because most of the costs are in feedstock price (naphtha), which fluctuates depending on the price of crude. When naphtha is cracked to produce ethylene, propylene is a by-product from which you get polypropylene.

Analysts say RIL's naphtha cracker is amongst the best in terms of costs and efficiencies-analyst estimate RIL's net back margins on ethylene, inclusive those on propylene, to be around $700-750 per tonne-Dow's margins are not known. ''All the costs would be high. It makes sense if RIL gets the assets at less than fair value,'' adds another analyst with an FII broking house.

The alliance could give Reliance access to markets and technology-but again, analysts say RIL hardly needs help in marketing. But over time, the JV could become a captive customer for RIL's plastics, if it decides to shift production to more low-cost locations like Jamnagar.

Funding the deal is not much an issue as Reliance could use the stake held by its share trusts, which hold 12.2 per cent of RIL's shares, say analysts. The trusts will see another 2 per cent addition of shares with the merger of IPCL with RIL. Analysts say these shares are worth nearly $5.5 billion (Rs 24,300 crore).

Reliance could park the 14-per cent equity in a special purpose vehicle (SPV) and bring in a partner or clutch of private equity investors who will invest an equal amount of money. This SPV can then be used to raise another Rs 50,000 crore in debt.

With mega projects like retail and three special economic zones (Rs 50,000 crore each), Ambani doesn't want to strain RIL even as it pursues high growth.