MUMBAI – Reliance Industries Ltd’s deal to sell a 10% stake in its subsidiary Jio Platforms Ltd could not have come at a better time for the company whose plans to go debt free at net level by March 2021 were looking less and less probable.
Facebook, Inc will be buying a minority stake in Jio Platforms, which houses all the digital businesses of RIL including Reliance Jio Infocomm Ltd, for 436 bln rupees or $5.7 bln, valuing the business at close to 4.3 trln rupees, the two companies said today.
The deal is an endorsement of RIL’s investment in the telecom business, which investors reckoned could pose more demands on capital. Investors cheered the deal with the stock jumping close to 8% during the session as it helps the company move closer to its goal of being debt free.
Of course, much of the plan to cut debt now hinges on RIL getting regulatory clearance for a plan to sell mobile towers network of Reliance Jio to Brookfield Asset Management for $3.7 bln. The remaining amount–$4.3 bln–was debt that was to be transferred from RIL’s consolidated books.
The tower deal along with the stake sale to Facebook has now become key to cutting debt as prospects of any investor buying its refinery business have collapsed with the slump in crude oil prices.
Brokerage firm Credit Suisse Securities India believes that the deal with Facebook puts RIL on course to be net debt free by March 2021. The deal, which is expected to be completed in two months, will help RIL considerably lower its 1.5-trln-rupee net debt in the current financial year.
However, till Tuesday investors were a worried lot as the collapse in global crude oil prices to near two decade lows all but ended the hopes that the company could achieve the ambitious target.
Investors were also fearful that with the substantial deteriorations in the revenues of the energy and retail business, RIL’s ability to meet short-term repayment will be severely affected, especially if it is unable to raise cash from various asset sales proposed by it.
The spread on the credit-default swaps of RIL’s internationally-listed bonds had jumped nearly 300 basis points in March, reflecting the deteriorating credit profile of the company.
The collapse in oil prices is threatening to derail the proposed minority stake sale to Saudi Arabian refining giant Saudi Aramco, which was announced by RIL’s Chairman and Managing Director Mukesh Ambani at the company’s annual general meeting last year.
Under the initial agreement with Saudi Aramco, the refiner was likely to buy 20% stake in the energy business of RIL for an enterprise value of $75 bln. The deal was expected to fetch $15 bln for RIL, which would have been sufficient to cut its net debt to zero by the intended timeline.
With the collapse in oil prices, the risk is rising that the deal will not go through, said brokerage firm Bernstein Research. The brokerage now values RIL’s oil-to-chemical business at $55 bln, which is a 20% discount to the valuation at which Saudi Aramco was expected to buy the stake.
To be sure, Saudi Aramco has said that it is still evaluating the deal and the due diligence process is underway, but with global crude oil prices now at two-decade lows despite attempts to cut production it appears unlikely that deal will go through in time for RIL’s liking.
It was this risk that led to RIL’s stock plummeting as much as 30% from their record highs hit in December. And, despite a 52% jump from the two-year lows hit in March, the stock is still down 18% from its lifetime high.
Besides the substantial reduction in risk of RIL not meeting its intended deadline for going net-debt free, the commercial aspect of the deal with Facebook is also positive from a long-term perspective, said analysts.
RIL has also agreed to enter into a commercial partnership between Facebook’s WhatsApp, JioMart and Reliance Retail in order to use the most popular instant messaging service in India as medium to connecting consumers and small business on JioMart. JioMart, which is under Reliance retail, is RIL’s ambitious plan to turn itself into a one-stop shop electronic commerce company on the lines of Amazon and Alibaba.
A key element of RIL’s new e-commerce plans is to drive digitisation of mom-and-pop retailers. While it is still early, the broad reach that WhatsApp enjoys in India could help towards scaling up of this business, said brokerage firm Citigroup Global Markets in a note.
While the current pessimistic environment may make it difficult for investors to factor in the qualitative benefits of the deal with Facebook, they sure are relieved that RIL’s debt will not give them sleepless nights anymore.