Corporate Front: M&A [Why Is Reliance Thinking Global, Acting Local?]

By acquiring India Polyfibres, the Ambanis are trying to consolidate their hold over the domestic market.

Ask Rama Prasad Goenka, 68, the Chairman Emeritus of the Rs 6,000-crore RPG Group, how he closed the sale of India Polyfibres-which manufactures Polyester Staple Fibre (PSF)-and his voice will betray a twinge of regret. At a social gathering early this year, Goenka walked up to Dhirubhai Ambani, 65, the Chairman of the Rs 13,400-crore Reliance Industries Ltd (RIL), and, without much ado, offered to sell him India Polyfibres, a Board for Industrial & Financial Reconstruction (BIFR) company. Ambani replied: ''I can buy your unit, but you won't get a good price.'' To which Goenka said: ''Let us sign the agreement first, and then you fix the price.''

His angst is understandable: he was offering to sell India Polyfibres to the man he had once refused in 1992. Not that he had much choice; the deal fits into the RPG Group's policy of focusing only on its core businesses of power, tyres, and telecommunications. And the Barabanki (Uttar Pradesh)-based India Polyfibres was practically moribund-nursed by the BIFR since 1991-with accumulated losses of Rs 168.54 crore.

Even a BIFR package in 1994 had failed to revitalise India Polyfibres, which has the capacity to produce 19,400 tonnes per annum (tpa) of PSF. Says Sanjiv Goenka, 37, Vice-Chairman, RPG Enterprises: ''It is clear that Reli-ance will be in the driver's seat. We believe they can add more value than us. They understand the business very well.'' Accordingly, Reliance Petro Products Ltd (RPPL) and the RPG Group signed a Memorandum of Understanding in late March, 1998.

It is obvious that RIL does not view the acquisition as a flash in the pan. For, it is also negotiating to buy, inter alia, the S.P. Gaekwad-owned polyester filament yarn company, the Rs 359-crore Baroda Rayon; the Vijaypat Singhania-managed Rs 1,180-crore Raymond Group's Rs 298-crore Raymond Synthetics (see box); and the polyester division (formerly Orissa Synthetics) of the Rs 2,708.15-crore Hari Shankar Singhania Group's Rs 774-crore JK Corp-all of which are scouting for bail-out packages. In fact, BT learns that in February, 1998, RIL set up a Rs 500-crore M&A fund. Citing that its revival package for India Polyfibres was, however, yet to be approved by the BIFR, the company did not speak to BT.

That proposal initially seeks to whittle down India Polyfibres' equity from Rs 46.45 crore to Rs 9.29 crore. Then, RPPL will pump in Rs 29.77 crore into India Polyfibres' equity-base, and an additional Rs 5.23 crore at a later stage. Another Rs 30.71 crore will be added to the equity by the conversion of loans extended by the banks and the financial institutions to India Polyfibres. While this will leave RPPL with a controlling stake of 39.69 per cent in India Polyfibres' expanded equity of Rs 75 crore, the RPG Group's stake will come down to 6.80 per cent from 54.92 per cent in September, 1997.

Simultaneously, RPPL will also pay off Rs 46.63 crore-one-third of the Rs 139.90 crore that India Polyfibres owes to the banks and the financial institutions. Thus, the package entails an investment of Rs 81.63 crore by RPPL. In return, RIL will acquire a depreciated plant with a capacity utilisation of 98 per cent, which would cost between Rs 150 crore and Rs 200 crore to set up from scratch.

Purchasing a plant with a capacity of a mere 19,400 tpa does not fit in with RIL's policy of setting up only global-sized, greenfield petrochemicals projects. In fact, this is 4.18 per cent of RIL's 4.64 lakh-tpa polyester-manufacturing capacity. Moreover, its location in faraway Uttar Pradesh-compared to RIL's psf plants at Surat in Gujarat and Patalganga in Maharashtra-eliminates any advantages that could be gleaned from economies of scale. Also, the depreciated unit does not provide RIL with any financial benefit unless it merges the unit into itself. But that will take time as RIL will not want to taint its balance-sheet in a hurry.

What, then, prompted RIL to acquire India Polyfibres? And scout for other m&a targets? For one, despite being the country's largest polyester manufacturer, RIL does not have the edge for efficient delivery to customers across the country. From its plants in Western India, it used to take RIL 8 days to reach customers in the East and the North East, and 4 days in the North. However, the acquisition of the Barabanki facility has reduced the time-lag by half: after April 1, 1998, RIL has been able to cover the East in 4 days, and the North in 2 days. Not only will the company's inventory-management become more efficient, RIL will also save Rs 1.70 crore per annum in freight costs as it will not have to transport 22,000 tonnes of polyester over a distance of 1,300 kms.

Moreover, the India Polyfibres unit occupies only 37 acres of a 110-acre site. This gives RIL the opportunity to expand the plant's capacity to the globally-competitive scale of 1-1.50 lakh tpa. With the commissioning of RIL's third plant-which has a capacity of 3.50 lakh tpa-at the Hazira complex in Gujarat, the group's purified terephthalic acid (PTA)-manufacturing capacity has gone up to 9.75 lakh tpa. While this accounts for the total domestic consumption of PTA, RIL's requirements stop at 5.57 lakh tpa. With its competitor, the Rs 1,453-crore Indo Rama setting up a 3.50- lakh tpa PTA plant, as well as SVC Superchem's proposed 1.20-lakh tpa plant at Chhata (Uttar Pradesh), RIL is scouting for captive users for its output of PTA.

This is where India Polyfibres will play a role. A user of di-methyl terephthalate-a substitute for PTA-India Polyfibres has now switched to the PTA route. And rppl has agreed to pick up India Polyfibres' entire production of PSF. So, RIL's marketshare will go up from 58.30 per cent to 60.15 per cent in an industry plagued by over-capacity.

Predicts Jardine Fleming's Equity Analyst, Jal Irani: ''These (takeovers) will happen in this industry. In fact, the majority of polyester manufacturers could be up for sale. RIL seems to be the only buyer in the market.'' Clearly, the domestic polyester industry has begun mirroring the global trend: 2 or 3 large manufacturers per country. Agrees R. Ramakrishna, 64, Secretary, Association of Synthetic Fibre Industry: ''Most manufacturers have either shut down or pruned production. Only big players can survive.'' Since a capacity below 50,000 tpa is not sustainable at the dismal prices ruling at present, there are bound to be more acquisitions-or marketing arrangements-in the making.

Since RIL can now service the North, where would its future acquisitions be? Apart from gleaning economies of scale in Gujarat-where many units have recorded recurring losses-RIL will want to expand its spread as a national synthetics manufacturer. In other words, expect the Ambanis to target companies in the South and the East, where more loss-making units lie waiting to be annexed by the King of Polyester.

WILL RAYMOND FIND A SUITOR?

Will the Complete Man soon shake hands with the Polyester King? It is no secret that the Raymond Group has been scouting for a buyer for its loss-making polyester filament yarn unit, the Rs 298-crore Raymond Synthetics. Despite its denials, the group has been negotiating with the Rs 13,400-crore Reliance Industries Ltd (RIL) for the sale of the Ahmedabad-based plant, which has a capacity of 60,000 tonnes per annum, since last year.

Ten months later, why hasn't ceo Vijaypat Singhania been able to clinch the deal to sell off Raymond Synthetics (accumulated losses in 1996-97: Rs 21.04 crore)? The answer lies in bargaining power. RIL's, that is. At a time when the polyester industry is swamped by overcapacity, RIL, the largest player in the market, can play hard-to-get. After all, no other group can afford to buy Raymond Synthetics, which has a Rs 340.84-crore debt burden.

Even Indo Rama, the second-largest player in the market, incurred a loss of Rs 87 crore in 1997-98. Moreover, the Asian crisis rules out the possibility of a transnational white knight coming to Singhania's aid. Meanwhile, he is aggressively restructuring his group. In May, 1998, flagship Raymond's Rs 180-crore steel unit was spun off into a 50:50 joint venture with the $22.68-billion Thyssen. And a search has also begun for a buyer for Raymond's Rs 245-crore cement division. But, as far as Raymond Synthetics is concerned, the wait continues.

--Chhaya