Sources with knowledge of the matter said Reliance Industries and Saudi Aramco have canceled a deal to buy a stake in the kingdom’s oil-to-chemical business due to valuation concerns.
Talks broke down over how much importance should be given to Reliance’s oil-to-chemicals (O2C) business as the world wants to move away from fossil fuels and reduce emissions, he said.
Instead, Reliance will now focus on signing multiple deals with companies to produce specialty chemicals for higher margins, sources said.
The world’s top oil exporter, Aramco, signed a non-binding agreement in 2019 to buy a 20% stake in Reliance’s O2C business for $15 billion. Last week, the companies announced they would re-evaluate the deal, ending two years of talks.
The deal’s collapse reflects the changing global energy landscape as oil and gas companies shift from fossil fuels to renewable energy. Valuations of refining and petrochemical assets have gone down especially after the recent COP26 climate talks in Glasgow, said a second source involved in deal discussions.
Despite this, Reliance stuck to a valuation of $75 billion for the O2C business it did in 2019, he said.
“The valuations done by the consultants showed a significant cut in valuation… a cut of over 10%,” he said.
In a recent note referring to Reliance’s sprawling refining complex, Bernstein wrote, “Reliance has highlighted the difficulty of separating Jamnagar from the clean energy business as a reason for not completing the transaction, although we suspect that Business alignment and valuation were also major reasons.” Gujarat.
A second source familiar with due diligence said the process was halted at an “early stage evaluation”. Sources said Reliance was seeking advice from Goldman Sachs and Aramco was seeking help from Citigroup. Banks declined to comment.
Jefferies downgraded the valuation of Reliance’s energy business to $70 billion from $80 billion, while Kotak Institutional Equities downgraded the enterprise value of its O2C business to $61 billion. Bernstein values that business at $69 billion.
Without confirming whether the deal has been cancelled, Saudi Aramco said it has a longstanding relationship with Reliance and will continue to explore investment opportunities in India.
Reliance said it will continue to be Saudi Aramco’s preferred partner for private sector investments in India and will collaborate with Saudi Aramco and SABIC for investments in Saudi Arabia. Reliance is the largest Indian buyer of Saudi oil.
change in strategy
Reliance, which aims to become net carbon zero by 2035, plans to switch to cleaner feedstock and energy in its O2C business and expand into solar power, batteries, electrolysers to produce hydrogen and hydrogen fuel cells.
A source familiar with the matter said, “The full value of this integration is derived by evaluating the repurposing of existing O2C assets as well as partnerships in several joint ventures and downstream ventures in specialty chemicals.”
Demand for specialty chemicals – used in industries such as agrochemicals, colourants, dyes, fast-moving consumer goods, pharmaceuticals, fuel additives, polymers and textiles – is set to grow in India as its economy expands. These chemicals offer better margins for companies than conventional fuels as demand for gasoline and diesel is expected to fall with more electric vehicles and renewables.
According to a government report, the Indian specialty chemicals sector will help boost exports from $32 billion in 2019 to an estimated $64 billion by 2025 as companies globally look to risk their supply chains dependent on China.
The group controlled by billionaire Mukesh Ambani has already announced a $2 billion investment in the UAE’s TA’ZIZ chemical joint venture between Abu Dhabi National Oil Company and sovereign wealth fund ADQ.
Saudi Aramco has also turned its attention to hydrogen and renewable energy as it goes net-zero by 2050.
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