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?
For Facebook, the benefits of the deal are hard to miss out. India is already among the largest user base for two of Zuckerberg’s largest social media platforms; Facebook and WhatsApp. Facebook is actually betting on being in the right place at the right time. India is undoubtedly one of the fastest growing digital market places in the world and this deal helps them to reach out to the entire Jio universe on the back of the existing 39cr digital footprint of Jio. In short, a combination of the user base of Reliance Digital, Facebook and WhatsApp gives them formidable access to almost every Indian household.
But the real cream that Facebook is looking from this alliance is to be able to tap the existing and potential small businesses in India. It is estimated that there are nearly 6cr small businesses in India providing direct and indirect unemployment to more than 70% of the employable population. That is where Facebook sees the biggest gap. Most of these small businesses are unable to scale up and that gap can be filled by a lethal digital combination. Cheap access to digital connectivity with the market prowess of Facebook can offer an enticing off-the-shelf solution to these 6 crore small businesses. The opportunity could be humongous and that is what Facebook is targeting from this deal.
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.
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.