Dr. Madhavankutty G
Head – Banking, Economy & Policy – ET Prime, Times Group
Introduction
Reliance Jio, the telecom arm of Reliance Industries, is aggressively inviting overseas investors.
Jio is not yet listed and is owned by RIL. Over the past 1 month, Reliance sold stakes in R Jio to Facebook (9.99%: USD 5.7 billion), Silver Lake, a technology focused firm (1.15%: USD 750 million) and Vista Equity Partners, an investment bank based in the U.S (2.32%: USD 1.5 billion). The overall stake sale through these three deals was 13.5% and RIL raised USD 8 billion (Rs.60,500 Crore). Reliance Industries share price has gone up by about 44.5% during the deal period from Rs. 1,080 to Rs.1,554 per share.
RIL daily share price movement during April 2020
Why the deals?
As the deal between RIL and Aramco did not happen and its major business of refining and petrochemicals turned weaker, RIL has been trying to diversify its revenue. The recent deals where 3 reputed foreign players are coming on board will greatly help RIL and RJio to increase their brand appeal and diversify revenue streams. The upcoming rights issue (where existing shareholders are allotted more shares) worth Rs.53,200 Crore, probably the largest in India, is also part of efforts to raise more funds.
Snapshot of RIL businesses
Implications
1) Market penetration: Facebook invested USD 5.7 billion (Rs.43,750 Crore) in Jio and picked up a 9.99% stake. The wide reach of Facebook and its messaging application WhatsApp will be helpful for Jio to expand its reach and further penetrate the market. Jio has 388 million customers and is the largest in India in the category. Moreover, Jio, Reliance retail and WhatsApp have entered into a commercial partnership agreement to accelerate e-commerce business on the Jio Mart platform. E-commerce is set to gain greater acceptance in India even post lockdown and WhatsApp and Facebook will help RIL in this effort. Facebook’s deep user base, WhatsApp large base of 400 million and Jio’s vast subscriber base is a win-win for all.
2) Reduction of debt: RIL had a net debt of Rs.1.61 Lakh Crore as on March 2020 and the three deals by bringing Rs.60,000 Crore has helped reduce net debt to Rs.1 Lakh Crore. This along with the upcoming rights issue of Rs.53,200 Crore (in a rights issue the promoter allots shares to existing shareholders in a pre-approved ratio) and a proposed investment by British Petroleum should help RIL to achieve a zero debt status by March 2021.
3) Gaining competitive advantage over rivals: The investments will help Jio maintain its competitive edge over rivals as it will reduce debt. Besides, the presence of major investors will increase credibility and enable Jio to raise funds cheaply later thus giving it the necessary capital to invest in future expansions. Moreover, possible tariff hikes at a later stage will help increase the Average Revenue Per User (ARPU). Due to the above factors Jio’s market value will increase which is good if it plans an IPO (Initial Public Offering) at a later stage.
4) Focus more as a consumer technology company: Silver Lake, based in Menlo Park, California, has USD 40 billion in assets. It has invested in companies including Airbnb, Alibaba, Ant Financial, Alphabet, Dell Technologies and Twitter. The expertise of Silver Lake in consumer focused tech business will help Jio in gaining better insights about customers. Along with investments by Vista Equity, world’s largest technology focused private equity fund, RIL will be able to position itself as a consumer facing company since its core business is weak. Telecom and consumer business now contribute 78% to RIL’s profit.
5) Higher brand appeal for Jio: Facebook, Silver Lake and Vista are global names and the presence of such foreign investors on board will help increase Jio’s and RIL’s brand image globally and may even help in securing future global deals. As of now, despite having presence from Oil to Telecom business, RIL remains a domestically focused brand.
6) Better ability to participate in auctions: Jio will have significant advantage over rivals when government comes up for spectrum auctions, especially for 5G at a later stage. The other two players are struggling and Jio has every possibility of emerging as the successful bidder. This will enhance Jio’s digital infrastructure many times. Over the long term this is a big positive for Jio and RIL shareholders in terms of value creation.
RIL target price by major broking firms
| S.No | Broking Firm | Target Price (Rs.) |
|---|---|---|
| 1 | CLSA | 1,770 |
| 2 | Centrum Broking | 1,595 |
| 3 | Motilal Oswal | 1,618 |
| 4 | Edelweiss | 1,645 |
| 5 | Emkay Global | 1,630 |
| 6 | Axis capital | 1,780 |
DISCUSSION QUESTIONS
1) Facebook and WhatsApp will help Jio to achieve greater market penetration. Explain.
2) How will the equity purchase deals of Facebook, Silver Lake and Vista help Jio to achieve greater market penetration?
3) One of the main purposes of the deals are to ensure that RIL positions as a consumer technology firm. Explain.
4) Why is it said that the deal will increase brand value of Jio?
5) How does these transactions help Jio to gain competitive advantage over rivals?
6) How is RIL planning to achieve zero debt status by 2021?
REFERENCES
- economic times.com
- Motilal Oswal Research report on RJIo Visa Equity
- Bombay Stock Exchange
- Research reports by brokerages like Centrum, Emkay, Axis capital etc.
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