why Facebook bought 9.99% stake in Reliance Jio for Rs 43,574 crore
This gives the social media giant a firm foothold in a fast-growing massive market and helps the Indian the oil-to-telecom conglomerate to significantly cut debt.
The company said, "This investment underscores our commitment to India, and our excitement for the dramatic transformation that Jio has spurred in the country."
To understand the background to the deal, it is essential to understand the Reliance Price chart since 2016, when Jio was launched
Data Source: BSE
If you look at the stock price chart over the last four years, the stock has grown nearly 3-fold since Jio was launched in September 2016. The approximate value accretion of nearly Rs500,000cr during this period can be largely attributed to Reliance Jio. While the refining and petchem business continue to be cash cows, there is limited value they could have added to the Reliance kitty. That is because of weak oil prices and tepid global demand. That is where the Facebook deal with Reliance Jio really fits in.
What is the Facebook – Jio deal all about?
As per the terms of the deal, Facebook will invest Rs43,574cr in Jio Platforms, the telecom and digital subsidiary of Reliance Industries. The deal will give Facebook a 9.99% stake in Jio Platforms on a fully diluted basis and it will value the Jio Platforms business at nearly Rs462,000cr. That roughly corresponds to the total value accretion that Reliance Industries has seen in its market cap between the launch of Jio in September 2016 and April 2020. This not only makes Facebook the largest minority shareholder in Jio Platforms but also gives the Reliance group the much needed currency to value its digital business.
How does Facebook derive value from the deal?
1.Facebook has now become Reliance Jio's largest minority shareholder.
2.With Jio's 388 million customers, Facebook gets access to a wider audience.
3.Will help in creating opportunities for 60 million small businesses across India.
4.To help people and businesses operate more effectively in growing digital economy.
2.With Jio's 388 million customers, Facebook gets access to a wider audience.
3.Will help in creating opportunities for 60 million small businesses across India.
4.To help people and businesses operate more effectively in growing digital economy.
For instance, by bringing together JioMart, Jio’s small business initiative, with the power of WhatsApp, we can enable people to connect with businesses, shop and ultimately purchase products in a seamless mobile experience, Facebook said.
Our efforts with Jio will be focused on opening new doors and fueling India’s economic growth and the prosperity of its people, it said.
This is not the first time Facebook has bought a stake in a company in India. Facebook owns minority stake in Meesho -- a social commerce company and Unacademy -- an online education startup.
Since its launch three years ago, Jio, led by billionaire Mukesh Ambani, has grown at a sprinter’s pace to become India’s largest telecom company. It has accumulated some 340 million customers through a barrage of innovations, including offering cut-throat mobile internet prices.
The deal will help reduce RIL’s debt burden of, which bulged due to the breakneck expansion of Jio and other businesses. Ambani invested around $40 billion to launch Jio in 2016. RIL is also the largest retail player in India thanks to a series of aggressive expansionary moves into consumer-facing businesses such as ecommerce and grocery.
The Facebook deal is now the centrepiece of the ambitions of India’s biggest private company to cut net debt to zero by March 2021.
RIL has in recent months accelerated efforts to reduce debt by attempting to sell stakes worth billions of dollars in some of its businesses. It is in talks with Saudi Aramco to sell 20 percent of its oil to chemicals business and Canadian private equity firm Brookfield Asset Management for a stake in its tower business.
For Facebook, India has in recent years emerged as a critical market. The company has more users in India than any other country. Its WhatsApp chat service, which is about to launch a payments service, has attracted 340 million users.
Despite the rapid growth of its social network and WhatsApp, Facebook stumbled with its Free Basics plan to provide free internet services after a ban by Trai, the telecom regulator. It now has an established ally on its side that is present in sectors ranging from telecom to ecommerce to home internet
A recent report by Cisco said India is poised to have more than 900 million internet users due to the increased penetration of affordable smartphones and cheaper internet plans. India will also have around 2.1 billion internet-connected devices by 2023, said the report.
Last year, Reliance said that it would turn Jio into a new digital services company by investing nearly $15 billion, potentially attracting investors in the run-up to an eventual listing. The Jio-Facebook comes after Microsoft signed a 10-year deal with Reliance in 2019 to power the Indian company’s data centers with its Azure cloud.
What is in the deal for Reliance Industries?
One thing that Reliance Jio has managed in the last 44 months since its launch is to disrupt the telecom business. With 39cr subscribers for its telecom business, RIL has emerged as the largest telecom player in India; ahead of Bharti Airtel and Vodafone Idea. But RIL realizes two imperatives at this point of time. Firstly, the incremental growth in the telecom business is going to follow the Law of Diminishing Marginal Utility. The focus will now have to be on profits and the digital experience. The profits will come as ARPUs will anyways expand due to just 3 players remaining in the industry. The bigger challenge now is on monetizing the digital experience. For that Reliance Jio really needs the backing of a dominant digital engine like Facebook or WhatsApp and this deal gives them both.
A bigger narrative for RIL is about the debt levels of the company. Look at the chart below.
Chart Source: Bloomberg
Debt reduction is the big priority for RIL. In the last five years, the group has seen its gross debt doubling and its interest cost going up 10-fold. Clearly, a lot of the newer funds have been coming at much higher cost. Just a year ago, Mukesh Ambani had laid out an aggressive plan to become zero net-debt in less than 24 months. The Saudi Aramco deal was supposed to infuse $15 billion but with WTI prices negative, that deal looks doubtful for now. It is in this context that the $5.7 billion Facebook deal assumes significance. It not only provides the Mukesh Ambani group with ready cash to defray debt but also offers a veritable digital currency for the future.
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