Reliance Jio- Facebook deal and its many meanings

The contrast couldn’t be starker. Younger brother, Anil Ambani, is ordered by a British Court to pay up $ 716 million or Rs.5000 crores  to a clutch of Chinese companies, whereas the elder brother and chairman of Reliance Industries (RIL), Mukesh, is being wooed by social media giants, global oil majors and technology funds to invest in his company!

In these dark times when companies are melting and funds have become scarce, Mukesh Ambani’s companies like Jio have managed to seduce US social media giants like Facebook and technology investors like General Atlantic and Silver Lake to put funds in his companies so that the fate of his brother does not visit him and his business in an extremely difficult economic environment. FB and these investors would not have countenanced Reliance Jio favorably if it did not have the approval of the US government.

Besides making Reliance debt free by March 2021 as promised by Mukesh Ambani, these investments are also meant to hedge against the fickle mindedness of the central government, which, contrary to dominant perceptions, is not helpful towards the Reliance Industries — on certain regulatory issues — as visible in the proposed sale of a stake in RIL to Saudi Aramco.

Reliance Industries has become a globalized company and the way it is being wooed by American companies suggests interesting geo-political implications.

The company, like other Indian businesses, also fears that India’s status may be downgraded to junk by the rating agencies in the current post Coronavirus circumstances and that would make it very difficult to raise funds in the near future. These apprehensions get exacerbated with reports about the ambivalence of the central government regarding the Reliance Jio stake sale to Facebook.

These misgivings should have visited the investors also, but, for strategic reasons, they have chosen to ignore it.

While the Chinese, too, it is learnt, were keen to put in money in Jio, but significantly, Reliance opted for funds from US companies. Three of them are investing in Reliance Jio Platforms – namely, Silver Lake has announced an investment of Rs 5655.75 crore, General Atlantic of Rs 6598.38 crore and Vista Equity has announced an investment of Rs 11367 crore. Facebook is picking up 9.9 per cent in Reliance Jio for $5.7 billion (Rs 43,574 crore).

Some of these American Equity firms have also invested together with Gates Foundation in companies that are engaged in pharma research. Jio which has given boost to Corona patient tracking app-Aarogya Setu- could see more new apps in health, pharma space. Now Bill Gates owned Micorsoft is also planning to buy $2 billion worth of stake in the company. If this happens, Jio would be on a very sure wicket.  

This is heady stuff in Indian industry and it is taking place at a time when the government has expressed fears of a takeover of domestic companies by predatory capital.

AT THE FACE of it, Mukesh Ambani seems to be in firm control in these difficult circumstances, but recent happenings suggest that he has a lot to worry. His companies are not getting any loans from PSU banks as they have crossed the limit, and then there are the hounds of the enforcement agencies. If he had not got the FDI then he would not have been able to raise any funds from the Indian debt market.

The company, like other Indian businesses, also fears that India’s status may be downgraded by rating agencies to junk in the current circumstances and that would make it very difficult to raise funds.

Keen market-watchers see a pattern in these announcements about large investments by foreign companies and funds. It betrays a business guile that has helped in building Mukesh Ambani’s enormous myth. First, there is a grand announcement of a large sale of stake, which is then leveraged to sell smaller pieces at resultant super high valuations.

The first was when Saudi Aramco offered to pick up 20 per cent RIL stake for $15 billion in Aug 2019. This announcement took his plummeting stock up from Rs 1100 to Rs. 1600. Coincidentally, this mega deal was announced when Credit Suisse in its August 5, 2019 report had shown the company to be running huge liabilities of $65 billion that included the funding of Jiophone and East West pipeline.  

Till now there have been zero inflows from the oil deal, but it has helped in raising the profile of its balance sheet and made the company attractive to funders.

In the same month the company also announced $3.7 billion or Rs 25,215 crore from Brookfield in Jio Towers. However, till now, there are zero inflows, as DoT MHA and MoF have not cleared the deal due to concerns regarding money-laundering and security clearance of other partners.

This FB deal of $5.7 billion also appears to be a large announcement that creates a valuation of Jio Platforms (brand new company) from Rs 0 to Rs 5 lakh crore in a matter of six months due to the promise of multiple revenue streams from the same platform.

None of the funds have arrived from FB as yet. However, Jio has announced real deals (Silver Lake, Vista and now Saudi) of much smaller share sales but at a much higher valuation, which goes contrary to estimations by the Credit Suisse report, which finds that the capital investment per user is about $109 — but its value is $9 only. The Jio valuation was only $24 billion on the assumption that the value of each user goes up to $18. This is far below what FB has valued the company, proposing to buy 9.99 shares for $5.7 billion.

At the face of it, Mukesh Ambani seems to be in firm control in these difficult circumstances, but he has a lot to worry. His companies are not getting any loans from PSU banks as they have crossed the limit.

Besides the telecom business, oil refining also presents big challenges to the company. The Credit Suisse report flagged these issues long before the world shuttered down due to Corona virus. It stated that the refining capacity was to increase in the Middle East and in China, which will reduce RIL’s margins in the coming days. The lockdown due to Corona virus will result in big losses in the next few quarters after the price of oil plummeted.

Reliance is expected to lose Rs 4000 crores in the 4th quarter due to buying price for its refineries being $40/barrel . There is a view that the company is losing cash and it is desperate to ensure that it does not sink due to the pressure that the government has been bringing on through the enforcement agencies and a scared banking sector.

Hence, the desperation to raise cash and also the knowledge that a Negative Outlook to Junk Rating that is coming from S&P and Fitch for India would make investments into India very difficult.

RIL raised Rs 8500 crore in April this year from the Indian debt market at 7.2 per cent rate of interest in April this year and Rs 10,000 crore on May 12 at 7 per cent. The financial institutions like Axis, ICICI, SBI, HDFC etc. lent these funds. RIL will use this money to buy its rights issue (50 per cent stake in Rs 53000 crore issue). Banks have lent to RIL so that it can buy his own shares.

Reliance Industries has become a globalized company and the way it is being wooed by American companies suggests interesting geo-political implications. This stands in direct contrast to the manner in which Anil Ambani, first, got investment from Chinese entities due to his proximity to the government and later was being hauled up by them (Chinese) to the courts when they realized that equations had changed.