Leverage, deals & a succession plan: Mukesh Ambani has an eye on the future
- RIL has been the busiest deal maker in India Inc, buying businesses and selling stakes in them.
- Ambani has also been negotiating with Saudi Aramco, the world’s largest oil company.
- After investing more than $40 billion to create the world’s largest 4G network for Jio, India’s richest man would certainly like to take some money off the table.
On February 20, Lutyen’s Delhi had even been buzzing with speculation that a deal announcement was due. What came instead at that time was an innocuous statement from the Saudi Aramco chief executive Amin Al-Nasser about joint investments with Reliance in refining and petrochemicals, almost echoing his boss’ previous statements.
But for those who still find it difficult to fathom that Mukesh Ambani would seriously consider diluting his hold over the Reliance Industries (RIL) crown jewel, especially since he has always chosen to build rather than buy in his home market, here’s a reality check.
RIL has been the busiest deal maker in India Inc, buying businesses and selling stakes in them. In the past two years or so, it has bought or invested in around 27 businesses, half of them in the telecom and media space, to bulk up operations that are still at the growth stage. These range from music streaming apps and cable networks to telecom software and hardware units. Of a total $5.3-billion of investment in the past five years, 79% has been allocated toward deals in the telecom sector, Morgan Stanley estimates.
At the same time, for perhaps the first time, the company has been proactively exploring asset monetising even in its core home market through stake sales, innovative structures such as infrastructure investment trusts (InvITs) or even the outright sale of assets and businesses.
This, evidently, is a new strategy after the failed bid for Lyondell Bassell in 2009-10 or the misadventures in US shale gas, and has much to do with ensuring that the legacy of fiscal discipline endures as it is.
Reliance will sell stakes in firms that own its fleet of very large ethane-carrying ships to Japan’s Mitsui OSK Lines, it said on April 17. Reliance Jio Infocomm has already transferred its fibre and tower assets into two separate InvITcontrolled special purpose vehicles (SPVs) to reduce liabilities of $15 billion.
“The end objective will be to have a different set of investors who would want to run these companies. This means these assets go off our balance sheets, so liabilities also go down,” Srikanth Venkatachari, joint chief financial officer, RIL, had said in January. “We were surprised with the scale of the demerged tower and fibre assets (book value of $18 billion), which is the largest among telecom operators in India,” adds Nikhil Bhandari of Goldman Sachs Research.
Ambani has also been negotiating with Saudi Aramco, the world’s largest oil company, and Abu Dhabi National Oil Co for months now, for an equity partnership at the flagship refining and petrochemicals business. He has already sold his private pipeline entity for $2 billion to Brookfield, with an option of buying it back after two decades.
After investing more than $40 billion to create the world’s largest 4G network for Jio, India’s richest man would certainly like to take some money off the table.
With net liabilities of $45.1 billion, according to Jefferies, even Reliance needs to think of fiscal management, especially when it needs ammunition for the costly upcoming retail battle with deep-pocketed global rivals Amazon, Walmart-owned Flipkart and Alibaba.
But, having turned 62 this April, this portfolio management exercise by Mukesh Ambani is also about baby steps toward succession planning.
Ambani Senior is an astute billionaire, a perfectionist manager who revels in projects of unprecedented scale and scope. First, refining and petrochemicals, then retail and now telecom — the Reliance juggernaut has disrupted businesses across brick-and-mortar and digital like few others before it.
He’s also a doting father who wants to ensure his legacy endures through his three children —Isha, Akash and Anant. And he well knows the pitfalls of not having a clear plan for who gets to run what.
All three are adults, two of whom are active in the business and married, with the third about to do so. As several of Reliance’s newer group businesses achieve adolescence, recasting the empire is seen as logical and value accretive all round. This could involve various strategies, such as spinning off retail or petrochemicals and bringing a specialist partner on board.
Reliance could take advantage of their expertise and cash, pay off debt, improve return on capital and reward shareholders. The next generation could each run telecom and media, retail, and energy as verticals with share sales that would release value.
It is a sensible step, feels ET columnist and family business historian Sonu Bhasin. “The promoter gives an opportunity to his inheritors to operate somewhat independently while protecting the core business. The inheritors, too, get an opportunity to work without a constant over-the-shoulder hovering presence of the patriarch! To build businesses with longevity, and to keep the legacy going, this verticalisation is one of the logical ways.” Quoting US industrialist and philanthropist Andrew Carnegie, she adds, “‘Three generations from shirtsleeves to shirtsleeves’ the most difficult transition that family businesses make globally is from second to third.”.
Some family friends disagree. “He’s all keyed up. He’s building the business for the next phase of his life. This is classic MDA 3.0,” quips an old Mumbai-based associate. “After the struggles with gas exploration and Jio’s teething problems, he’s an entrepreneur again. He’s done with his parental duties, got the kids settled. He’s raring to go and is all keyed up. Other family related distractions are also gone.”
Investors also prefer cleaner, leaner structures or verticals, discounting holding companies or a mixed bag of operations that tend to distract management. Conglomerates across the world have had to face the wrath of activist shareholders who have clamoured for carveouts and spinoffs to unlock value.
WIN-WIN FOR ALL?
Reliance Industries is at a crossroads in more ways than one — its organisational DNA is changing as GeNext takes up more proactive roles in executive leadership and management. Meanwhile, the old-world commodities and industrials champion is evolving into an increasingly consumer-facing enterprise.
The legacy energy business still constitutes the lion’s share of 75% of group’s Ebitda (earnings before interest, taxes, depreciation and amortisation) while the younger consumer-facing businesses account for the rest. Ambani wants to take that to 50% as Reliance looks to pivot to being India’s answer to Google or Apple — or better still, a combination of AT&T and Amazon — to offset business cyclicality.
March quarter results announced on April 18 show why that makes sense — refining margins continue to be squeezed, leading to an 18.6% drop in sequential Ebit while retail and telecom, though improving, are yet to offset the shortfall.
“RIL highlighted ‘unprecedented capacity buildup in ethylene and paraxylene chains, utilisation rates to drop and weakening olefin and aromatic cycle.’ This is the most negative commentary we have heard from RIL in petrochem. Given the sheer size of the business (43% of FY19 Ebitda), multiyear weakness in petrochem would be negative,” highlight Pinakin Parekh and Sanket P Parab of JP Morgan.
But getting closer to consumers and fortifying the telecom and retail businesses, the next big frontiers, will need money — and lots of it. Reliance has already spent $2.5 billion buying or investing in ecommerce, telecom and digital assets. Jio’s liabilities alone have ballooned to Rs 1.29 lakh crore in March 2019, as per CLSA estimates, which includes Rs 67,000 crore of debt and Rs 21,100 crore of spectrum liabilities. But as the competition fights to retain share with the refarming of spectrum in 4G and introduction of minimum average revenue per user (ARPU) plans, the economics of the telecom trade have become challenging.
“Together with higher other current assets, therefore, net liability rose a staggering $6.7 billion on-quarter to $52.5 billion (4.3x last 12 months’ Ebitda). Net debt rose to $33.7 billion with other liabilities up to $18.8 billion as vendor dues rose,” says Somshankar Sinha, analyst at Jefferies. “The announced sale of the very large ethane carriers and fibre/tower InvIT spinoffs helped pare net liabilities back to $36.4 billion, though. Yet, with telecom Ebitda slated to fall too, the deals may not be substantively accretive unless third-party revenues (which Reliance quantifies as $11 billion in discounted cash flow upside) accrue quickly.”
As mentioned before, with a user clocking below $2 in average billing, even an ambitious 30% operating margin for a 1 billion-plus market translates to $8 billion gross Ebitda. Doubling revenue market share to 40% would only lead to a $3 billion Ebitda pie for Jio, after deploying 12 times that in investments. Ambani needs a silver bullet — and that will come from ecommerce, content and carveouts.
A blockbuster deal — say with Aramco and/ or others — can slash a third of the liabilities that Reliance has and even help on long-term crude contracts. BP has been its partner for the upstream oil and gas business, and a similar mid- or downstream alliance could be the launch pad for joint petrol pumps and aviation turbine fuel (ATF) sales to take on newer entrants such as Rosneft. Ambani was in Abu Dhabi last week. He and his senior management had visited Riyadh in February to meet the Aramco top brass and even discussed new frontiers of R&D and product development, including crude to chemicals and non-metallics.
Selling tower assets to Brookfield or floating another InvIT-like structure with five to six sovereign wealth funds, such as Abu Dhabi Investment Authority (ADIA), Qatar Investment Authority (QIA) and long-only pension funds like Canada Pension Plan Investment Board (CPPIB) or Public Sector Pension Investment Board (PSP, also Canadian) will further improve net debt to Ebitda ratio of around 3.7x, based on the current year’s debt and earnings estimates.
…BUY STRATEGIC TOO
Reliance has always chosen its partners carefully. Bringing BP on board in 2011 was as much about its deep-water drilling and natural gas expertise as it was for the cash.
As Reliance positions itself as a technology company, Ambani is betting small yet strategically on sunrise offerings — frontier applications developed by niche, nascent entrepreneurs. He’s seeking to integrate complementary services under the telecom and media businesses, becoming both, a software developer as well as a hardware manufacturer, in the process.
The recent M&As are all aimed at creating a digital ecosystem around Jio, acknowledged Anshuman Thakur, the telecom unit’s strategy head. “Lots of things we do organically, but we come across entrepreneurs, business leaders who are doing interesting work on technology, on platforms that can be integrated with Jio,” he said on April 18. “There are certain core capabilities that some of these companies bring, such as national language processing or artificial intelligence (AI), so we are looking at those capabilities… There are people focusing on them so it helps to expand faster, and this is with focus on whole digital services layers.”
Having invested in or acquired content and distribution platforms such as Network 18, Saavn and Balaji, Jio’s bundling approach is playing out, as it adds about 30 million subscribers every quarter. Fibre-to-the-home (FTTH) will provide broadband access and pay TV, along with a range of new-generation services. The Hathaway and Den acquisitions provide access to living rooms across India. Next up: The internet of things.
The Reliance Retail omnichannel initiatives are being implemented through Reliance Trends and partner brand stores integrated for online order fulfilment, returns and refunds. The recent policy flux gives it a distinct edge over overseas-owned ecommerce rivals. To plug the gaps, Reliance is buying fashion brands from ITC. It has also acquired Haptik, which runs one of the world’s largest conversational AI platforms and focuses on key customer engagement use cases such as concierges, lead generation and live chat. Loss-making toymaker Hamleys, already the most successful joint venture partner of Reliance Brands, is also likely to be scooped up.
“This is a perfect string of pearls. For a Reliance, these are small transactions and often go unnoticed,” says an investment banker who has worked on a few of them, on condition of anonymity.
After years, the Reliance stock has been on a rising streak — up 45% in the last 12 months, during which the Nifty50 has barely climbed 12%. Investors would only want more from here on.
Put yourself in Mukesh Ambani’s shoes. More than improving leverage ratios or market capitalisation, what would be the greatest prize? A legacy that can be sustained over the next few generations. And to that effect, he has set the ball rolling.
(With additional reporting by Devina Sengupta in Mumbai)