Could Ambani’s loss be Adani’s gain as it explores a deal with Saudi Aramco?

In November last year, Mukesh Ambani-led Reliance Industries Ltd (RIL) and Saudi Aramco called off their proposed $15 billion deal under which the Saudi oil and gas behemoth was to acquire a stake in the Indian company’s energy business. 

That deal reportedly fell through because of differences over valuation. But now, it appears, Reliance’s loss could be Adani’s gain. 

If news reports are to be believed, the Gautam Adani-led Adani Group is exploring potential partnerships in Saudi Arabia, including the possibility of buying a stake in Aramco. 

A Bloomberg news report says that the Adani Group has held “preliminary talks on a range of potential cooperation and joint investment opportunities with Saudi Aramco and the country’s Public Investment Fund (PIF)”.

So, what are the likely contours of the proposed deal?

The report says that while Adani is unlikely to shell out billions of dollars in cash for Aramco stock, at least in the short term, it could seek to link an investment to a broader tie-up or asset swap deal. 

The Adani group, the report says, could team up with Aramco or subsidiaries like Sabic in areas such as renewable energy, crop nutrients or chemicals. 

Moreover, as per the report, Adani may also offer the PIF the opportunity to invest in infrastructure in India. 

How serious are the discussions?

Citing unnamed sources, the Bloomberg report says that the discussions are “are at an early stage, and Adani hasn’t made a decision on which form any potential cooperation could take”.

What is in it for Aramco?

Aramco has been looking to diversify and wants a slice of the Indian market. A deal could help Aramco deepen relationships in one of the world’s fastest-growing energy consumers.

Moreover, Saudi Arabia has been looking to boost ties with India for several years. During a 2019 visit to meet Prime Minister Narendra Modi, Saudi Crown Prince Mohammed Bin Salman said the country could invest $100 billion into India.

What went wrong with the Reliance deal?

Aramco spent more than two years negotiating a potential $15 billion investment in Reliance, but backed off, reportedly due to valuation concerns. 

According to a November Reuters report, talks reportedly broke down over how much Reliance's oil-to-chemicals (O2C) business should be valued as the world seeks to move away from fossil fuels and reduce emissions, they said.

The collapse of the deal reflects the changing global energy landscape as oil and gas companies shift away from fossil fuel to renewables. Valuations of refining and petrochemical assets have gone down especially after the COP26 climate talks in Glasgow, the report had said. 

So, what was Reliance’s O2C business valued at?

It was reportedly valued at $75 billion. But others valued it lower. "Evaluation by consultants showed a significant cut in valuation...more than a 10% cut," the report said citing a source. "Reliance has highlighted the difficulty of separating Jamnagar from the clean energy business as a reason to not complete the transaction, although we suspect business alignment and valuation were also key reasons," it further said. 

Jefferies has cut its valuation of Reliance's energy business to $70 billion from $80 billion, while Kotak Institutional Equities has cut the enterprise value of O2C business to $61 billion. Bernstein valued that business at $69 billion.

Have the Saudi government-controlled PIF and Aramco been seeking other strategic relationships?

Yes, last month, the Saudi government transferred a 4% stake to PIF. The shares are now valued at about $89 billion based on Aramco’s Thursday closing price in Riyadh.

PIF recently has kicked off discussions about how to monetise that holding as it seeks to raise funds for its ambitious investment goals. 

In fact, the PIF has done several deals in India, buying stakes in Reliance’s retail business, wireless arm and fibre-optic network assets. Reliance has also appointed Yasir Al-Rumayyan, who’s chairman of Aramco and governor of the PIF, to its board.