"Henry Ford never diversified; Bill Gates didn't diversify. The way to get rich is to put your eggs in one basket, but watch that basket very carefully. And make sure you have the right basket," said well-known American investor Jim Rogers.
The Ambani family obviously thinks differently, and is now laughing all the way to the bank. With oil and petroleum products seeing a major decline world-over, Reliance Industries Ltd’s diversification into consumer businesses are paying off at just the right time.
The company announced on Wednesday that it has entered into a binding agreement with Facebook, Inc. for the sale of a 9.99% equity stake in subsidiary Jio Platforms Ltd for ₹43,574 crore ($5.7 billion). The transaction values Jio Platforms, which houses the Reliance Jio Infocomm Ltd business, at an enterprise value (EV) of ₹4.62 trillion. This is higher than the average ₹4.2 trillion EV ascribed to the company by top brokers such as Kotak Institutional Equities, JP Morgan India, Citi Investment Research and Goldman Sachs India. Some domestic brokers such as Moitial Oswal and IIFL Institutional Equities had valued Jio at over ₹5 trillion, but they were in the minority. Analysts at Jefferies India Pvt. Ltd say, “Valuations suggest that Facebook expects Jio's Ebitda to double from current levels."
In any case, the moot point is that RIL and Jio have managed to raise $5.7 billion in an environment such as this, where the high level of uncertainty owing to covid-19 has hit both markets in general and deal-making in particular.
Since last year, RIL has been under pressure to reduce its debt, and while the company had laid out a plan to become net debt free, it hadn’t had much breakthrough especially with a delay in its deal with Saudi Aramco. The latter is expected to invest $15 billion for a 20% stake in RIL’s oil-to-chemicals business.
Investors are clearly enthused with the Facebook deal, with the RIL stock rising 10% in an otherwise dull market on Wednesday.
Apart from the debt reduction, Jio Platforms also gets access to Facebook’s technological expertise in developing products such as JioMart and reach through platforms such as WhatsApp.
While investors await further details of what the transaction entails, one thing is clear: RIL’s diversification is paying off handsomely. According to an analyst at a domestic institutional brokerage, “RIL’s investment is Jio stands at about Rs1.8 trillion." So what cost the company about Rs18000 crore is being sold for over three times that amount. Rogers would agree that at least in some cases, the way to get rich is to ‘not’ put your eggs in one basket.
(With inputs from Pallavi Pengonda)