• News
  • Columns
  • Interviews
  • BW Communities
  • Events
  • BW TV
  • Subscribe to Print
BW Businessworld

That’s How The Big Boys Play!

Most mergers & acquisitions (M&A) are complex; some are more so. Like Reliance Industries (RIL) sale of its 49.9 per cent stake in EFS Midstream to Texas-based Enterprise Product Partners for $1.07 billion

Photo Credit : BW Archives


Mukesh Ambani, chairman, RIL

Most mergers & acquisitions (M&A) are complex; some are more so. Like Reliance Industries (RIL) sale of its 49.9 per cent stake in EFS Midstream to Texas-based Enterprise Product Partners for $1.07 billion. In a span of around eight months, teams of operational people, investment bankers, lawyers and support staff, worked on the deal to close it in record time. And that why’s it’s the M&A Deal of the Year in the BW’s I-banking Survey 2016 with the knowledge support of PwC.

In A Nutshell
Having invested in EFS Midstream in 2010, RIL upped its oil and gas treatment plants, condensation stabilisation facilities, and transportation pipelines to the point of steady yields. Oil and gas treatment plants and pipeline assets link fields to consumers. EFS Midstream’s assets included 460 miles of gathering pipelines, 10 full-service central gathering points across dedicated acreage, processing facilities that in the end take the oil and gas produced to consumers’ locations.

In late 2014, RIL decided to sell them and, in the process, free up capital to invest in other value-generating ventures. But the sale of EFS Midstream assets hinged on one critical condition — RIL needed to ensure it could utilise these assets in future. RIL (45 per cent interest), Pioneer Natural Resources (46 per cent) and Newpek (9 per cent) have considerable investments (joint venture) in the Eagle Ford shale oil-fields in the US. As production from these fields needed a distribution system, the deal had to take into account complex negotiations and agreements, which had to be executed taking into consideration production volumes, prices, and the various jurisdictions in which operations were conducted. Not only that, Pioneer owned a 51.1 per cent stake in EFS Midstream assets. So, getting the two parties to sell the assets and modify agreements so they could continue to use the assets at competitive prices were critical in the clinching of the sale.

Putting Heads Together
Bank of America-Merrill Lynch (BankAm-ML) and Citigroup were mandated with the challenge to bring all parties across geographies on common ground. Says an RIL spokesperson: “The transaction was between two sellers; and there were a large number of agreements that needed to be modified, relating to terms and conditions of supply and use of Midstream’s assets after the sale. Reliance and Pioneer continue to be the largest users of Midstream’s assets and needed to ensure the system was available for future needs at competitive prices.”

Says Raj Balakrishnan, managing director and co-head, investment banking at BofA-ML (India): “For the two companies to decide to work together and go ahead and finalise an M&A deal is something that obviously adds degrees of complexity. Second, they needed to continue and use this asset for their requirements.” At the same time, agreements had to be negotiated, the deal had to take into consideration volume commitments from the Eagle Ford JV among Reliance, Pioneer and Newpek.

After many rounds of negotiations, EFS Midstream’s sale of assets term-sheet was signed in May 2015, and the deal concluded in July 2015. RIL got $1.07 billion for its share in the assets. The entire deal was priced at $2.15 billion in cash, to be paid in two instalments — $1.15 billion upon the initial finalisation (closing) of the deal and $1 billion no later than first anniversary of the initial closing.

Says Rahul Saraf, managing director-Investment Banking at Citigroup: “The transaction was unique as it was executed in a volatile oil and gas price environment — profitably monetising a large part of the investment made by Reliance and Pioneer — and at the same time retaining their ownership over the upstream assets.”

An RIL spokesperson noted that falling oil prices did not impact the value of the deal; in retrospect it would have been much tougher six months later.

For both the deal makers, BankAm-ML and Citigroup, the jurisdictional challenges meant that global teams were working on the deal 24/7. Negotiations were often long and took into consideration various statistics that measure the price of oil plus minimum volume commitments. But, in the end, it was a deal well done.