Reliance IndustriesNSE 10.29 % on Monday signaled a tectonic shift in its decades-long, successful business model of going it alone by proposing to offload stake in its oil-to-chemicals business to Saudi Arabian giant Aramco for an enterprise value of $75 billion (around Rs 5.3 lakh crore). It also announced that it will henceforth forge partnerships for major businesses with global giants and confirmed reports of strategic interest in its telecom and retail businesses.
Saudi Aramco has agreed to buy 20% in the oil-to-chemicals division, the core business of RIL. However, the global oil giant will only have an economic interest for the first five years, not a direct equity stake. The oil-to-chemicals business will function as a division of RIL. Aramco will pick up a direct stake after five years, when the division will be spun off into a separate company and become a subsidiary of RIL.
Monday’s announcement about the Aramco deal and the confirmation from RIL chairman Mukesh Ambani about upcoming strategic stake sales in the telecom and retail businesses and their subsequent public listing sets the stage for Reliance Industries to eventually become a holding company with significant downstream investments.
The move comes amid investor concern about the ability of new businesses to generate cash flows to repay debt. RIL officials and Ambani himself downplayed these fears, which had led to a fall in share price in recent days.
The deal was touted as a win win for both Aramco and RIL shareholders.
Talks on With Aramco
Aramco, RIL officials said, will gain access to Reliance’s vast refining and petrochemicals complex and the fast-growing Indian market while the Saudi oil behemoth will be able to lock in a major chunk of its crude supplies in a volatile geopolitical environment.
Addressing the annual shareholders meet earlier on Monday, Ambani said RIL aims to become a zero net debt company in about 18 months and that the proposed and forthcoming divestments will help achieve that. RIL shares had crashed last week after brokerage Credit Suisse downgraded the stock to ‘underperform’ from ‘neutral’, citing a rise in liabilities. On Monday, the company’s global depositary receipts (GDRs) recovered in London after the announcement on Aramco and some investors said the deal was good for shareholders.
The deal comes just a week after RIL announced it is transferring its fuel retailing business to a joint venture with BP. The British giant will pay Rs 7,000 crore to RIL for this transaction. Reliance Jio, the group’s telecom subsidiary, had earlier struck a deal with Brookfield Asset Management to transfer its tower assets to an investment trust owned by the Canadian asset manager for about Rs 25,000 crore.
ARAMCO DEAL STRUCTURE
The Aramco deal, if and when concluded, will be one of India’s largest foreign direct investments. The Saudi company will get a couple of seats on the board of the oilto-chemicals unit and one seat on the board of Reliance Industries. It will also get to appoint some key management personnel in the oilto-chemicals division, possibly the chief operating officer. The deal has been structured in such a way that the Saudi giant will not own any shares directly in the oilto-chemicals unit for the first five years. The division will function as a strategic business unit or division though it will have its own board and management.
RIL officials said talks are on with Aramco on due diligence and the nature of the investment instrument that will be issued to the Saudi firm. Discussions are also on over the equity value and amount of debt that will be assumed by Aramco. RIL officials said the payment for equity will be received once the instrument is finalised, and that the receipts will be staggered. About 50% will be received by March 2020, if the deal gets completed by then, with 25% being paid on each successive anniversary of the transaction. “The regulatory approvals would be only for the financial instrument, so it will not take much time. If we were to carve it out into a separate company, it would have taken a long time to get permission,” said RIL executive director PMS Prasad.
DEBT CONCERNS
RIL has zealously guarded its independence since Dhirubhai Ambani founded it as a textile trading firm in Mumbai textile market in the 1970s, even as the company built world-scale capacities in petrochemicals and refining. On Monday, Mukesh Ambani, chairman of RIL and the founder’s elder son, hinted at the annual general meeting that it was time to change. “The coming year will mark the beginning of the most ambitious value-creation strategy in the history of Reliance and in the history of India. At the heart of our new value-creation strategy is our innovative philosophy of transforming relationships into partnerships. Partnerships with leading global and Indian companies. All these partnerships will form a new business coalition capable of creating exponential value for our five stakeholders: Indian economy, Indian people, our customers, employees and shareowners,” Ambani said.
He also confirmed that RIL has received interest from global majors for investments in its telecom and retail businesses, and that the group will take a call in the next few quarters. The two businesses, which function as separate subsidiaries, will be listed in the next five years, Ambani said. “We have received strong interest from strategic and financial investors in our consumer businesses, Jio and Reliance Retail. We will induct leading global partners in these businesses in the next few quarters, and move towards listing of both these companies within the next five years,” he said.
Ambani said Reliance Industries aims to become a zero net debt company in the next 18 months through the Aramco deal and possible sale of stakes in the telecom and retail businesses.
RIL officials believe the total enterprise value of the group is around $200 billion (around Rs 14.20 lakh crore), including the retail, telecom and upstream oil & gas exploration businesses, and that the conglomerate will easily be able to raise any amount needed. Shares of many Indian companies have been buffeted in recent weeks on concerns over high debt and possible delays in repayment due to global troubles amid a slowing local economy. Some RIL investors have been worried about the level of debt at the standalone unit and the group level, which now stands at close to Rs 3 lakh crore.
Credit Suisse last week said its downgrade factors in higher liabilities from crude payables ($10 billion), JioPhone financing ($1.7 billion), commitment to East West Pipeline (present value $2.4 billion), lower multiples for refining, slower growth in consumer electronics, lower valuation of Reliance Jio due to weak average revenue per user (ARPU) in the first quarter of FY20 and slow rollout of fibre-to-the-home (FTTH). “The deal is expected to have a positive impact on RIL valuation as the EV (enterprise value) seems to be above street valuations,” said Abhijeet Bora, research analyst at Sharekhan. “Additionally, the company’s target to become zero net debt company by March 2021, and likely value unlocking from retail and digital services businesses through listing and induction of global partners would further add to valuation,” he added.
“This programme to aggressively pursue deleveraging in businesses such as OTC (oil-to-chemicals), fibre and tower, and emerge as a zero net debt company in the next 18 months will strengthen the consolidated balance sheet, leading to strong valuation (and) re-rating of the stock,” said Ajay Bodke, CEOPMS at Prabhudas Lilladher.
Replying to shareholders at the AGM, Ambani said the company will set up a task force to explore opportunities in J&K and Ladakh, and will soon make announcements about investments there.
Source: Economic Times