Random Musings

My friend, Mehul makes some very valid points, in his open letter to Mukesh Ambani, with regards to the proposed merger of RIL and RPL. I hope that the sentiment reaches the decision makers in the Reliance group. With Mehul’s permission, I am reproducing his letter, verbatim, as under:

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Shri Mukesh Ambani,
This refers to your announcement of proposed merger of RIL and RPL.
While i am sure the economies of scale created will be of enormous value to shareholders in the long run,
am voicing few concerns on the same for shareholders of RPL.
1)Most of your “loyal” shareholders purchased shares of RPL on the day of listing (11-May-2006) around average price of Rs.87
2)They have been holding onto these shares for almost three years without any dividend or other return
3)Their cost including three years interest (@15%) works out to around Rs.133.
(against present market price of Rs.75 approx.)
4)At present swap ratio of shares based on market value they would receive approx 1 share of RIL for every 17 shares held.
5)Would request you to consider a swap ratio favourable to RPL shareholders (say 1 : 13)
6)This would benefit you in several ways as below
(i) earn the respect of RPL shareholders (who feel cheated that you sold 5% RPL stake in the market at above Rs.220)
(ii) ensure at least some return to RPL shareholders who held on waiting for the refinery to begin
(iii) send a message to the investor public that you care about your shareholders
(they presently believe the merger is just a ruse to reduce the equity of RPL from 4500 crores to about 250 crores wherein
again if you extinguish your 70% holding and buy back Chevrons 5% you would have to service an equity of only Rs.70 crores)
What would this cost you – ABSOLUTELY NOTHING
Lets say that all RPL capital gets converted into RIL capital at a swap ratio of 1 : 13
The additional equity created would be approx. Rs. 350 crores.
Of this you already own 70% in RIL which can be extinguished.
Net additional equity created would be only Rs. 105 crores (vis a vis 80 crores in a swap ratio of 1:17)
By creating an additional 25 crores of equity you will earn the respect of a number of loyal shareholders of the Reliance family.
Your brother was kind enough to do similarly during allotment of bonus shares in Reliance Power wherein he did not claim his entitlement of bonus shares.
While you may feel that this was just a paper gimmick the market thinks otherwise.
Hope you are able to understand your shareholders pysche as your father did and move in the right direction.
warm regards,
Mehul Zatakia

p.s. if your board members need convincing will be happy to meet them personally to explain the rationale of above
Mehul Zatakia
9892013019
Financial Advisor
Sykes and Ray Equities (I) Ltd.
Daulatram Mansion, 2nd floor,
Kitridge Road, Colaba,
Mumbai – 400 005
tel (o) 22874615, 22797371
(res) 23674416, 22934547

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Disclosure: I hold shares in both, Reliance Petroleum Ltd as well as Relaince Inds. Ltd.