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Reliance JIO: Three big deals in 3 weeks. Why?

"We have a very clear road map to becoming a zero-net-debt company within the next 18 months, that is by 31 March 2021," Mukesh Ambani (Chairman, Reliance industries) announced this in an annual general meeting (AGM) last year. He wants to bring the net-debt (not gross debt) from Rs 1,61,035 crore to zero by March 2021. He also set a target to grow the company's EBITDA by 15% annually over the next five years. Reliance was a debt-free company until 2012, but since then,debt has increased by 400%.

Reliance's high net-debt:

One of the primary reasons for the colossal debt of Reliance industries is the investment in Reliance Jio. The company has so far invested close to Rs 3 lakh crore in Jio, and the total debt grew by Rs 69,000 crore in just last year.
Another reason is the Rs 1 lakh crore investment in the petrochemicals business in the last 10 years.
To achieve this target of making Reliance a zero net-debt company by next year, Reliance has successfully cracked three massive deals in the last three weeks.

1. Investment from Facebook:

The first step towards achieving this goal was to sell 10% of the equity in Reliance Jio platforms to Facebook to raise Rs 43,574 crore. It makes sense that Reliance wants to lower down their net-debt, and that's why they sold their stake to Facebook. The bigger question is why Facebook is interested in this deal?
  1. According to PwC, the total number of internet users in India will reach 85 crores by 2022. Hence, it's a great opportunity for Facebook to partner with the fastest growing telecom company in India and attract a large portion of this segment to WhatsApp and Facebook app.
  2. Facebook has also become a partner in JioMart (an online grocery delivery service) through WhatsApp that will allow customers to order groceries and other essentials from local businesses.

2. Investment from Silver Lake:

US private equity firm Silver Lake has $40 billion in combined assets under management, invested Rs 5,655.75 crore in Jio Platforms for a 1.15% stake. It has invested in companies such as Twitter, Airbnb, Alibaba, Dell, etc. "Jio Platforms is one of the world's most remarkable companies, led by an incredibly strong and entrepreneurial management team who are driving and a courageous vision," said Egon Durban, Silver Lake co-CEO and managing partner. This deal will allow the Silver lake to diversify their portfolio by investing in the east.

3. Investment from Vista Equity Partners:

Vista Equity Partners, one of the largest tech-focused venture capitalist firms of the world, bought a 2.3% stake worth Rs 11,367 crore in Jio Platforms. "We believe in the potential of the Digital Society that Jio is building for India. Mukesh's vision as a global pioneer, alongside Jio's world-class leadership team, has built a platform to scale and advance the data revolution it started." - Robert F. Smith, Founder, Chairman, and CEO of Vista, said. With this deal, Vista equity is the third-largest investor in Jio platforms after Reliance Industries and Facebook.

Zero net-debt by next year, Why?

  1. In August 2019, Mukesh Ambani had announced the sale of 20% interest in refining and petrochemicals business to Saudi Aramco for Rs 1,00,000 crore by the end of March 2020. That deadline has been missed because the government had asked a court to restrain the deal in December by accusing Reliance of wrong doings. It was one of the reasons Reliance has started looking for other investors to reach their goal of zero net-debt by next year.
  2. Reliance has accrued an enormous debt (Rs 1,61,035 crore) over the years. Mukesh Ambani wants to transform Reliance industries from a commodities business into a technology company which is not possible with this burden of debt. It will become challenging to sail through this recession with such a significant liability on the company. Best investors turn to cash in times of recession, and this could be one of the reasons for getting to zero net-debt as soon as possible.
  3. Last year, Credit Suisse (a credit rating agency) downgraded its rating of Reliance from neutral to underperform due to its high liabilities on the balance sheet. Soon after Mukesh Ambani announced the zero net-debt plan, Credit Suisse revised its rating from underperform to neutral. The rush to zero net-debt free plan would be one of the reasons to improve the credit rating of the company to gain investors' trust and make it easier for the company to raise capital at a low-interest rate.
  4. Last but not least, Ajit Mishra(VP Research, Religare Broking) believes that these deals and a zero net-debt plan would pave the way towards Jio IPO in 2021.
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