Reliance Retail to buyback minority

Reliance Industries (RIL) has announced that it’s subsidiary Reliance Retail (RRL) has approved a proposal to buyback and reduce it’s equity share capital to the extent held by the shareholders other than it’s promoter and holding company, Reliance Retail Ventures Limited (RRVL).

  • RIL holds 85.06% of RRVL, which in turn holds 99.93% of RRL
  • RRL is now buying back this balance 0.07%, i.e., 7,865,423 shares
  • Buyback price has been fixed at Rs 1,362/ share valuing RRL at Rs 12.31 lakh cr ($149 bn)
    • Total outlay on buyback is estimated at Rs 1,072 cr – an inconsequential amount for Reliance
    • In the unlisted market, the stock was being traded at around Rs 2,700 (2x of buyback price) and last year had gone upto as high as Rs 4,300/ share (3.16x of the buyback price)
    • The fair value as determined by two independent valuers Ernst & Young and BDO, is Rs 884.03 and Rs 849.08 a share, respectively – valuing the Company at $93-$97 bn (Rs 7.68-8.01 lakh crore).
    • In December 2019, when the RRL stock was trading at around Rs 900 apiece, RIL had announced a scheme of arrangement where it’s shareholders were offered one share of RIL in exchange for four shares of RRL. This scheme valued the shares of RRL at about Rs 380 per share.
    • In 2020, RRVL raised Rs 47,265 crore from global private equity funds for 10.09%, valuing the company at Rs 4.2 lakh cr.

Why is Reliance doing this?

Amounts involved are small for the group. The exercise could be to avoid an unnecessary speculation on the stock in the grey market given that so little shares are available for trading.

Given steep discount to the grey market price, is it an unfair deal to the minority shareholders and can they oppose?

Optically one may call it an unfair deal. However, please note –

  • Grey market price is no reflection on the fair valuation. Some people bought shares at as high as Rs 4,300 per share valuing RRL at Rs 39 lakh crore i.e., > $ 450 bn.
    • This seems ridiculously high given that Walmart is valued at $410 bn and RIL itself was then entirely valued at < $ 180 bn
    • RRL is paying a 50% premium over the fair value estimated by the independent valuers. Anyone therefore cannot term it unfair.

Given the above and the fact that it’s small number of minority shareholders, unlikely that any material opposition could happen.

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