Why Saudi Aramco deal is key to debt plan of Indian billionaire

Mukesh Ambani's Reliance Industries is on a mission to reduce debt after racking up $76bn in capital expenditure
Why Saudi Aramco deal is key to debt plan of Indian billionaire
Chairman of India's Reliance Industries, Mukesh Ambani . (PUNIT PARANJPE/AFP/Getty Images)
By Bloomberg
Tue 13 Aug 2019 09:40 AM

Billionaire Mukesh Ambani’s Reliance Industries is on a mission to reduce debt after racking up $76 billion in capital expenditure in the last five years.

The conglomerate aims to be a zero-net-debt company in 18 months, Asia’s richest man told shareholders Monday. Aiding that effort would be a decision to sell 20 percent of Reliance’s oil-to-chemicals business to Saudi Arabian Oil Co, or Aramco, at an enterprise value of $75 billion. The company will also start preparing to list its retail and telecommunications units within five years, Ambani said.

The tycoon is cleaning up the group’s finances following years of spending on his wireless carrier, whose entry in 2016 with free calls and cheap data upended the industry and spurred a consolidation.

The $50 billion plowed into the phone venture, mostly in debt, has raised concerns among analysts including at Credit Suisse Group that Reliance’s ballooning borrowings could weigh on growth. Ambani sought to allay those fears.

“With these initiatives, I have no doubt that your company will have one of the strongest balance sheets in the world,” he said. “We will also evaluate value unlocking options for our real estate and financial investments.”

Signaling an end to the spending cycle at Reliance Jio Infocomm, Ambani is setting a new growth path for his group, whose bread-and-butter business has been oil refining and petrochemicals. The company is building an e-commerce platform by leveraging its phone network and Reliance Retail to eventually take on Amazon.com and Walmart.

“This is a unique business model we are building in partnership with millions of small merchants” and mom-and-pop stores, he said. As part of the plan, Reliance has been forming partnerships and acquiring technology assets. This month, Reliance announced plans for a joint venture with Tiffany & Co to open stores for the jeweller in India, and in May paid $82 million for the British toy-store chain Hamleys.

The new businesses are likely to contribute 50 percent of Reliance’s earnings in a few years, from about 32 percent, Ambani said.

While the spending on Jio has helped Reliance lure almost 350 million users in the world’s second-biggest mobile market, the growth has come at a price.

Reliance had a net debt of 1.54 trillion rupees ($22 billion) at the end of March 31, according to Ambani. His plan to carry zero debt would mean the borrowings would fall below the company’s cash reserves, a level not seen since 2013.

Last week, Credit Suisse cut its recommendation for Reliance’s stock and the price target citing reasons including rising liabilities and finance costs. Shares of the company have slumped about 18 percent from a record reached on May 3, compared with a 3.6 percent decline in the benchmark S&P BSE Sensex.

Reliance’s debt is backed by “extremely valuable assets,” Ambani said, signaling his group isn’t prone to the kind of troubles that have been plaguing many other corporate borrowers in India. The conglomerate controlled by Ambani’s younger brother, Anil, has been struggling to pay creditors while his mobile carrier has slipped into bankruptcy.

Apart from the Aramco deal, Reliance also announced a joint venture with BP this month, under which the European oil major would buy 49 percent of the Indian firm’s petroleum retailing business. Reliance would receive about 70 billion rupees under this deal.

The “commitments” from the Aramco and BP deals alone are about 1.1 trillion rupees, Ambani said, adding that Reliance will induct “leading global partners” in telecom and retail units in the next few quarters.

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