Mumbai: A patriarch builds a business empire. He has two sons who are very fond of each other. The patriarch dies, the brothers fight a bitter battle that is personal, legal, even political. Then, just as suddenly as the fight began, it ends. The brothers make up.
Given that this real-life story is set in Mumbai, India’s commercial capital that also serves as the seat of its film industry, the only thing missing in this story may be a family song in the finest tradition of Bollywood.
Through the years: Mukesh Ambani and Anil Ambani attend Reliance Industries’ annual general meeting held in Mumbai in June 2004. Reuters
Still, according to some analysts and at least one media report, only the music will be missing at the annual general meeting of shareholders of Reliance Industries Ltd (RIL) scheduled for Friday. The brothers Ambani, Mukesh, 53, and Anil, 51, are both expected to be present at the meeting, the former in his capacity as chairman of RIL and the latter as the chairman’s recently reconciled younger brother. The families of the brothers, and their mother are also expected to attend the meeting.
And, as if to lend to the event that fairytale touch, it is happening on 18 June, the fifth anniversary of the day the brothers arrived at a settlement, carving up the Reliance empire between themselves.
Friday’s meeting will happen at the Birla Matoshree auditorium in south Mumbai, the same venue where only last July Anil Ambani levelled allegations of “dishonourable conduct” against RIL at an annual general meeting of shareholders of Reliance Natural Resources Ltd (RNRL).
RNRL, of which Anil Ambani is chairman, was then fighting a case against RIL over gas from the latter’s fields in the Krishna-Godavari basin that was to be used to fuel power plants of the former’s associate company Reliance Power Ltd in keeping with the agreement between the two Ambanis.
India’s Supreme Court ruled in favour of RIL on 7 May.
On 23 May, the brothers signalled a reconciliation and announced that they had scrapped the no-compete agreement they had signed in June 2005. That paved the way for Mukesh Ambani to diversify his empire and Anil Ambani to diversify his.
It also paved the way for Friday’s happy-family photo-op.
Is it for real?
Some analysts see the reconciliation as a case of blood being thicker than water. Others insist that it is merely a convenient business arrangement. Still, both sets of analysts admit that the rapprochement is in the best interests of shareholders of the companies involved. Both brothers could have spent the time spent in courts creating wealth for shareholders in their companies, goes the reasoning.
That would seem to echo the sentiment within the two camps (or is it one camp now?) althou-gh representatives of RIL as well as the Reliance-Anil Dhirubhai Ambani Group (R-Adag) didn’t participate in this story.
“We are all very happy that this has come to an end. Time spent earlier in the courtroom can now be spent discussing business, and of course there are synergies between both the groups that can be explored,” said a person close to Mukesh Ambani who asked not to be identified.
Given that RIL is likely to generate $18 billion of excess cash between 2010-11 and 2013-14, according to a Goldman Sachs estimate, the conglomerate, wh-ich is in businesses such as oil, petrochemicals, gas, yarn, life sciences and retail would likely look at new business opportunities. Growth areas such as telecom, power generation and financial services that were inaccessible to RIL owing to the non-compete have now opened up.
“RIL being able to enter businesses with high-growth potential would be a welcome development for the Indian corporate sector as it brings in economies of scale into whatever venture it starts,” said Arun Kejriwal, director of investment advisory firm Kejriwal Research and Investment Services Pvt. Ltd.
Sure enough, within a fortnight of the non-compete pact being scrapped, RIL announced the acquisition of Infotel Broadband Services Pvt. Ltd, the only company that won pan-India rights for broadband spectrum. RIL will invest $5 billion in building this business.
R-Adag was quick to welcome RIL’s entry into the broadband wireless space, saying Reliance Communications Ltd, or RCom (a company set up by Mukesh Ambani and then transferred to Anil Ambani when the assets were split), would look forward to offering its services to RIL.
Over the past few days, in the run-up to the annual general meeting, unsubstantiated media reports have claimed that RIL may also look to enter the power generation business by bidding for mega projects being allocated by the government or acquire a private asset.
Analysts say that RIL may provide more information and even make important announcements on what it intends to do in the new avenues that have opened up before it during Friday’s meeting. They do not even rule out Mukesh Ambani announcing his entry into nuclear power.
The core of the dispute
Although the fight between the brothers seemed, in recent years, to be over natural gas, this isn’t the case. Although neither Mukesh nor Anil has commented on this, analysts surmise that the brothers may have grown apart over differences in management style or under the influence of associates.
In 2004, two years after their father Dhirajlal Hirachand Ambani died, Mukesh Ambani said in an interview to CNBC-TV18 that there were “ownership issues” in the company.
In 2005, the brothers, after a bitter battle for control, separated their business interests. Mukesh Ambani retained RIL; he handed over control of four companies—Reliance Natural Resources, Reliance Capital Ventures Ltd (now, Reliance Capital Ltd), Reliance Energy Ventures Ltd (now, Reliance Power Ltd) and Reliance Communications Ventures Ltd (now, Reliance Communications)—to Anil Ambani.
The brothers also agreed that neither would enter a business where the other was present and that RNRL would get gas from RIL. Subsequently, RIL claimed that it was merely the operator of the gas field, that the government owned the gas, and that it could not sell the gas at a price not approved by and to a buyer not mandated by the government. This position has been upheld by the Supreme Court and some analysts say that this isn’t really a victory for RIL because in its desire to make sure RNRL doesn’t get the gas, it has given up its control over the precious resource—surrendering this to the government.
Years between and future
Since the 2005 settlement, RIL has had mixed fortune. Its core business has flourished and it generates a significant cash surplus every year, but its ventures into retail and special economic zones have run into some trouble.
Reliance Power managed the largest ever initial public offering, raising Rs11,700 crore but subsequent shareholder disenchantment forced it to make an unplanned bonus issue. It has also won from the government rights to build three mega power plants. However, its plans to build a power plant in Dadri have run into trouble over issues related to land-acquisition and gas supply.
RCom has Rs 33,000 crore of debt on its books, and an attempt to merge it with South Africa’s MTN Group failed after Mukesh Ambani claimed he had the first right to the company’s shares should Anil Ambani wish to sell them. The truce between the two brothers should address some of these issues.
For instance, it will “help in negotiating the new gas sales agreements and obtaining gas volume allocation” according to 24 May report by Credit Suisse analysts Sanjay Mookim and Prashant Gokhale.
And it will make it easy for RCom to find a strategic investor which will hold 26% stake in the company. In preparation, RCom has indicated that it will spin off its tower and DTH (direct to home television) businesses.
The biggest area of synergy between the two groups lies in the telecom space, say experts. RIL, having snapped up Infotel, would need infrastructure to roll out its services that RCom can provide and RIL can supply the cash that RCom needs.
“Given the competitive landscape in telecom, financial services etc., any potential entry by RIL could be in the form of co-operation with R-Adag or via industry consolidation,” said a 24 May note, authored by Nilesh Banerjee and Nishant Baranwal of Goldman Sachs. “There could be complementary synergies between RIL’s logistics business and for retail and Adag’s infrastructure business.”
There could be other synergies too.
Anil Ambani would dearly like to see Reliance Capital, a company he has grown into some position of strength in the financial services business, become a bank and Mukesh Ambani’s support in this cause can’t hurt.
Expectations that today’s meeting will shed light on some of these issues will make it one of the most watched events in recent times.