Mukesh Ambani’s Problem of Plenty

His most recent attempt was to make a play for the Rotterdam headquartered petrochemicals major LyondellBassel. The ailing company has a global footprint and a distribution network that holds the potential to allow RIL to make a transition into markets outside India.

When it entered the fray at $12.5 billion, the price seemed right as well. Ambani had attempted something similar in 2005 when he asked his A-team to go after Innovene, a subsidiary of BP. But it lost out on the bid to UK-based chemicals company Ineos.

Unfortunately for RIL, soon after it pitched for LyondellBassel, Apollo Management, a private equity firm, got into the game and upped the ante by offering $15 billion. On his part, Ambani was unwilling to offer anything more than $14.5 billion.

To seasoned Ambani-watchers, this didn’t come as a surprise. At $14.5 billion for the bankrupt firm, it translated into eight times next year’s earnings before interest, tax, depreciation and amortisation. This price would have been in line with valuations in the global chemicals business and RIL’s projections. Anything more than that would have been out of character for a company that has a reputation of being conservative with cash.

So, just what are Ambani’s options?
Option 1: Focus on becoming an integrated oil major and eventually aim for breaking into a league now occupied by the six biggest in the world (derisively called Big Oil). Though it prides itself on being integrated, RIL does not have the balance of upstream oil exploration, production and refining capabilities the majors have. “There are big gaps in terms of exposure to key oil and gas basins, that are vital and need to be filled,” says Neil Beveridge, senior analyst covering Asian integrated oil companies at Sanford Bernstein in Hong Kong. RIL is better positioned than any other Indian oil and gas company to get there, he says.

Option 2: Become a bigger petrochemicals and refining player, with increased global presence, through acquisitions like LyondellBassel.

But, says Beveridge, returns will be higher if RIL opts for the high risk, high investment first option. While the refining business has been profitable, there is overcapacity now. And little value can be created by getting bigger, he argues.

Which one will it be then?

Of course, there is a view that RIL need not look at opportunities outside Indian borders. Stock market commentator S.P. Tulsian is a votary of that school of thought. He reckons the cash on hand can be absorbed and deployed profitably in domestic projects. For instance, he argues, ramping up gas production to beyond 120 million standard units per day or for that matter funding new oil and gas finds in the blocks RIL owns can bring in growth.

It seems unlikely, though Ambani subscribes to this school. Sources close to Ambani say he is increasingly dissatisfied with the kind of returns that now accrue in the oil refining business. The second refinery at Jamnagar was built to deal with more complexity crudes to produce cleaner fuels. The bet was it would eventually deliver higher margins riding on the back of growing demand in India and other parts of the world. While the company doesn’t declare information on both refineries separately, results since the time the project went on stream show little improvement.

This is because when the tide went out, RIL was caught as much by surprise as anybody else. There is nothing companies can do to control prices of crude or products — the difference between the two is what you call refining margins. Not just that, petrol and diesel prices in India are still controlled. RIL had hoped they would be decontrolled.

The other constraint to hunting for growth in India is that most capital intensive areas in the infrastructure space like roads and power, where RIL could have used its project management skills effectively, are off limits, thanks to a no-compete clause with younger brother Anil Ambani. To that extent, it would seem Mukesh Ambani has made up his mind.

Some signals emerging out of RIL’s headquarters indicate Ambani is shaping the firm to change course and look for opportunities outside the country. That explains the bid for LyndonBassell and another $2 billion bid for a Canadian oil sands company called Value Creations — not much of which is known in the public domain.

Ambani has also been building management bandwidth. The most recent entrant to the group is Walter van de Vijver, former head of Shell’s global exploration and production business where he had a rather interesting time. Following a controversy at the company that it had overstated oil reserves, Shell got into trouble with investors and regulators. In the melee that ensued, Shell sacrificed Vijver. Enraged, he got into a legal tangle with Shell and the matter was finally closed when Shell agreed to pay him £2.5 million as settlement. He took the money and moved to the US where he set up a private equity firm, Delta Hydrocarbons, to invest and acquire interests in oil and gas fields across the world. Last year, he quit Delta over differences with the other promoters.