Mukesh Ambani is considering selling a 25% stake in Reliance Industries (RIL) to Saudi Aramco, world’s most profitable company and largest crude oil producer.
According to Mint, the two companies are in “serious discussions” about Saudi Aramco buying a quarter of RIL. Ambani is also seeking a higher valuation for his petrochemicals company.
Business Insider reported that Saudi Arabian Minister of Energy, Industry, and Mineral Resources Khalid A. Al-Falih met Ambani for a preliminary round of talks and even attended his son Akash’s wedding.
RIL has not officially commented on the deal but said it evaluates such opportunities on a rolling basis.
“As a policy, we do not comment on media speculation and rumours. Our company evaluates various opportunities on an ongoing basis,” said RIL.
Profile: Saudi Aramco
Aramco is a state-owned oil company in Saudi Arabia and the world’s largest oil exporter.
It is also currently labelled the world’s most profitable company after it reported a net income of $111 billion in 2018. Aramco’s value was also twice that of Apple, which earned $59.5 billion in 2018.
The New York Times reports that Aramco outpaces other oil exporters by miles: Exxon Mobil earned $20.8 billion and Royal Dutch Shell was worth $23.9 billion.
However, Aramco’s successes are so closely tied to Saudi Arabian oil reserves that any disruption in the country could send the company’s profits plummeting.
Analyst at Euradia Group Ayham Kamel said, “Unlike Exxon and Chevron, its revenue streams are highly dependent on a single country that could face real instability risks.”
Regardless, the NYT says the company has a soft enough financial cushion to break its fall if business or oil prices go south.
RIL-Saudi Aramco deal is a win-win
Reports say that RIL is interested in creating a separate vertical for its petrochemicals and refining business, where Saudi Aramco could help. About three-fourths of RIL’s business comes from this sector.
BI also says Ambani will use the proceeds from the sale to pay off its large $32 billion debt after he bailed out his brother Anil.
The younger sibling was facing jail time after defaulting on payments to Ericsson. However, Ambani and his co-founder and wife Nita stepped in and paid off his debt.
Saudi Aramco has been interested in RIL’s business for the last four months.
The desire to work together intensified after Saudi Arabia’s Crown Prince Mohammed bin Salman’s visit to India, reports the Economic Times. Saudi Aramco CEO Amin Nasser was a part of the delegation accompanying Prince Salman.
During the visit, Spokesperson for the Ministry of External Affairs Raveesh Kumar announced that Saudi Arabia will make a massive $100 billion investment in India’s petrochemicals, energy, and refining sectors.
While Kumar said Saudi Arabia’s decision was a “huge vote of confidence” for the Indian economy, Prince Salman’s diplomatic visit and investments were also a form of damage control following the international outrage over some Saudi officials murdering journalist Jamal Khashoggi.
Aramco also stands to gain from investing in RIL. Ambani’s company is home to the world’s largest refinery. Moreover, Prince Salman wants to diversify the Saudi economy and move away from its dependency on oil.
But there are some losses
Aramco and Abu Dhabi National Oil Company are also collaborating on a $44 billion refinery and petrochemicals project in Ratnagiri, Maharashtra. However, local farmers have protested against the project and refused to give up their land.
The project was expected to use 14,000 acres in 14 villages in Ratnagiri and 1,000 acres in two Sindhudurg villages.
In February, while Prince Salman was visiting India, Maharashtra Environment Minister Ramdas Kadam announced that the Ratnagiri project will not be allowed to acquire land.
Business Line reports that Kadam’s party, the Shiv Sena, told BJP President Amit Shah that one of its conditions for an alliance in the 2019 Lok Sabha elections is the scrapping of the Ratnagiri refinery project.
What the deal means?
However, in the context of an RIL-Saudi Aramco deal, investing in India makes for a good business decision for Aramco because RIL already has infrastructure in place and India reports a high demand for fuel.
Investment by Saudi Aramco will allow RIL to expand its petrochemical refinery, and the market thinks so too. RIL’s shares surged by 2%. Experts are predicting that they will increase by 12 to 14% in the foreseeable future.
This deal with Aramco can only help RIL strengthen its capital and balance sheets and reduce the risks associated with expansion. India and Saudi Arabia’s bilateral relations will also improve.
Rhea Arora is a Staff Writer at Qrius.