Reliance heart Facebook?

Reliance heart Facebook?

Reliance is going to sell 10% of Jio to Facebook is what rumours say.

Let us digress

Indian family conglomerates do so many things it’s hard to answer the question – What does Reliance do? You could replace Reliance with Tata or Birla and the same would be true.

Reliance started as a textile business. Back in the day, Dhirubhai Ambani first sourced and then started manufacturing polyester and this story is well told in the movie Guru. They even had their own brand – Vimal, which, if any of you were born before 1990, you would be well aware of. Doordarshan used to run several ads.

In the mid-’90s the company started diversifying into two areas – Petroleum and telecom. Obviously, at the time, the winner in the telecom business came out to be Bharti and Reliance could not make much of a mark, although they kept switching avatars.

After the passing of Dhirubhai Ambani, the textile and petroleum business went to Mukesh Ambani and the rest of the experiments went to Anil Ambani including the telecom business (Infocomm) which on the CDMA network had established itself well. Anil got into media, energy and several other areas, none of which panned out well.

On the other hand, with the award of lucrative gas fields in Jamnagar, Reliance and its petroleum business kept doing well. It remained the cash cow over the years. But in order to exploit these gas fields as well as keep the business growing, not to mention Jio, Reliance was required to take on a lot of debt obligation.

Today the group debt totally stands at USD 22 Billion. Reliance is drowning in its debt.

Reliance heart Suadi Aramco

Saudi Aramco has the largest market cap of any company in the world. In December 2019, the company’s valuation cross USD 2 Trillion (yes with the T). Saudi Aramco is a state-owned company which essentially controls all of the Saudi oil deposits, productions and sales.

Saudi Aramco agreed to buy 20% of Reliance last year for USD 15 Billion. This was back in August 2019. Part of the reason was the refining capacity that Reliance has and the other deposits that it controls in India. There are certain industries that the government considers critical to national interest and oil is one of them. This deal seems to be stuck.

Not to mention, the Banking sector went into a turmoil with the moratorium being slapped on Yes Bank. The Indian banking sector had perennially high NPAs (non-performing assets). Raghuram Rajan the former RBI governor and the government clashed over this several times which eventually led to his ouster.

India has its debt ratings classified as next to Junk by Moody’s because of the state of the banking sector and one of the reasons for the demonetisation was to re-capitalise the banks and bring them to better health. That did not happen. The money went out as fast as it came in.

Given the situation, the debt that Reliance has accumulated will not wait, Corona or not. They have this small window of opportunity.

Enter Jio

Mukesh Ambani launched Jio to be the Google of India, actually more. He wanted to use his telecom network and control all of the data and information moving around the country. He even has the ambition to run the backbone of the Indian government data. He became an e-resident of Estonia to learn more about how the country holds data and how it uses it.

He also has been acquiring startups in the areas of AI, AR, Education, Dating and many other segments to bolster the services offerings around the Jio Brand. They even launched their own cloud storage business along with Microsoft.

And then came the Supreme Court. The order in Jan and then upheld in Feb, the order stated that all of the telecom operators owed the government Rs. 90,000 Crores in accrued fees. When the Vajpayee government had issued telecom licences they had done so through an agreement which stated that the telecom operators were to transfer a percentage of the Gross Revenue (AGR) to the government. There was a difference over how this would be calculated. The government took income from all sources including real estate, other services, etc. The telecom companies argued it should be only income through telecom operations. The case went on for 2 decades and at the end, the government prevailed.

This meant that all the fee accrued over those years, along with interest, penalty, et al had to be paid. Airtel alone had to pay Rs. 35,500 crores. The rest of the operators together owed the rest. Idea-Vodafone was swift to announce that with this outcome they would have no other choice but to shut down operations. They have not shut yet, but let us see.

If this comes to pass, it leaves telecom as a two-horse race and Airtel has not yet thrown in the baton, but Rs. 35,000 Crores is a huge burden.

Oil Turns

Screenshot 2020 03 26 at 7.46.37 AM
Oil Prices

Some government we have! Even before Corona happened the government was in trouble with lower GST collections and tax receipts falling. In February, Oil was still priced at USD 64 to a barrel in the global markets. As Chinese consumption started to fall due to the epidemic, Saudi’s went into a price war to force the American shale oil out of the market. This resulted in oil falling to USD 27 to a barrel where it is today.

Since the government tax income had been falling. The government moved to increase excise on oil and through multiple increases like this and this, making sure that the prices remained the same for us consumers and all the drop was passed on to the government.

Companies like Reliance, BPCL and IOCL gross lesser due to the fall in prices and this can be seen reflected in their share price. This is a huge hit to Reliance.

The Saudi Aramco deal is still stuck. We do not know the exact reasons for it, but I am sure since this pandemic, the Saudi’s are also reconsidering and do not have the same appetite for investments.

Enter Facebook

Jio has been the crown jewel and it has almost taken 50% of the telecom business in India. Once you control the pipes then you can control the services served through those pipes.

For many of the Indians who are coming to the internet for the first time, Jio has changed their lives. Making cheap data available in the hinterlands, the company has been able to change media consumption and many other behaviours and this has been well documented. There are still another 500 Million Indians to be brought online.

Facebook made its attempts at being the default through Facebook Basics. The proponents of free internet panned it and it got sent back by the government. Facebook wanted to become the web default and gateway to the world by launching Facebook Basics.

While that failed, the Reliance predicament offers them a great entry into the market with a legitimate telecom play where they can go ahead and do what they had always intended to. Reliance needs the money and Facebook needs the users. Its a match made in heaven. So Facebook is exploring buying 10% of Jio.

The external climate is changing pretty fast and it remains to be seen if they are able to consummate this relationship. I would see this as a loss for Indian Net Neutrality War if this deal manages to get through.

Let us wait and watch.

Leave a Reply