Reliance to spin off O2C biz with $25 billion loan
New Delhi: Billionaire Mukesh Ambani's Reliance Industries announced the contours of spinning-off its oil refining, fuel marketing and petrochemical (oil-to-chemical) business into an independent unit with a $25 billion loan from the parent, as it looks to unlock value by settling stakes to global investors like Saudi Aramco.
The carving out of Reliance O2C Limited (O2C) will enable the focused pursuit of opportunities across the oil-to-chemicals value chain, improve efficiencies through self-sustaining capital structure and a dedicated management team, and attract dedicated pools of investor capital, according to a company presentation filed with the stock exchanges.
The transfer of twin refineries at Jamnagar in Gujarat, petrochemical sites in multiple states, and a 51 per cent stake in the fuel retailing business to O2C will be on a 'slump sale basis', subject to requisite approvals that are expected to come in by September.
However, upstream oil and gas producing fields such as KG-D6 and textiles business will not form part of the new unit, where it aims to maintain a significant majority stake.
The consideration for the transfer will be in the form of long-term interest-bearing debt of $25 billion to be issued by O2C to Reliance Industries Ltd (RIL). RIL's external debt is proposed to remain with RIL only.
Once completed, RIL — the company founded by Dhirubhai Ambani in the late 1960s — will house only the upstream oil and gas exploration and production business, financial services, group treasury and legacy textile businesses, and act as a holding company of the group.
The retail business is held in Reliance Retail Ventures Ltd and telecom and digital ventures are nested in Jio Platforms Ltd.
Long-dated loans issued by O2C to RIL, as part of the reorganisation, will provide an efficient mechanism to upstream cash generated from O2C to RIL, the presentation said.
RIL has been in ongoing discussions with Saudi Arabian Oil Company (Saudi Aramco) to sell a minority 20 per cent stake in its O2C businesses, which, if successful, should lead to further deleveraging of the company.
While Moody's Investors Service said the separation of O2C business "will facilitate a potential stake sale to Aramco, possibly enabling a further reduction in RIL's net debt," Fitch Ratings said the reorganisation "will have a neutral impact on RIL's credit metrics and rating."
The wholly-owned O2C unit's assets will be funded by the interest-bearing loan, which will be an "efficient mechanism to upstream cash, including any potential capital receipts," in the unit, RIL said.
RIL will provide a loan of $25 billion to the O2C subsidiary at floating interest rate with the subsidiary having about $42 billion of assets (28 per cent of consolidated assets). Even though the O2C assets will move into a new arm, its debt will continue to sit inside RIL.
In August 2019, RIL had agreed to upstream Rs 1.08 lakh crore of Jio's debt to make its telecom venture debt-free, ahead of inducting strategic and financial investors like Facebook, Google and KKR.
RIL sold a 33 per cent stake in the digital services to global investors including Facebook and Google for Rs 1.52 lakh crore and 10 per cent in its retail subsidiary to global investors for Rs 47,265 crore.