>RELIANCE INDUSTRIES (bid for Lyondellbasell)

Impact on our views: We believe RIL’s proposed bid for Lyondellbasell would be EPS accretive for RIL shareholders, based on a bid EV value of US$11-US$12bn, assuming an annualized US$2bn EBITDA for Lyondell (current YTD EBITDA run rate of US$1.7bn) and a hurdle IRR rate of 18% for RIL. We maintain our Overweight on Reliance Industries.

Non-organic Growth – Part I - Bid for Lyondellbasell

What's new: RIL has today announced a preliminary non-binding cash offer to acquire a controlling interest in Lyondellbasell upon its emergence from Chapter 11 reorganization. Lyondellbasell filed for Chapter 11 bankruptcy for its US operations in January 2009. Facts on Lyondellbasell: Lyondellbasell is one of the world's largest polymer and petrochemical companies
and is privately-owned by Prochoice GmbH. Lyondell has debt of US$25bn (as of Sept 30, 2009) with a market value of US$12-13bn. The company has year to date operating profit of US$1.68bn for F2009 as against peak and trough EBITDA of US$4.4bn and US$2.0bn respectively.

Facts on RIL: RIL has debt of US$14.6bn with debt:equity of 0.42, cash of US$4bn (as of Sept 30, 2009) and a T-stock valued at current market price of US$8bn giving it sufficient liquidity to fund acquisitions. We estimate RIL generating US$4-US$5bn of free cash flows over the next three years post the next quarter.

Hurdles for the deal: We believe the key hurdles to the deal are: 1) Clearance from the Bankruptcy Committee and bankruptcy judge 3) Private equity owners who have purchased first and second lien debt may want to block the deal 4) Regulatory hurdles for foreign investors
in certain jurisdictions. Chinese companies were prevented from buying Unocal.5) Access Industries (the current owner) and Apollo have bought a lot of the 1st/2nd lien debt, so they will have a say in approving any bid.

To read the full report: RIL