Reliance Industries has decided to reorganise its telecom and digital facing business by setting up a wholly owned subsidiary for digital platform initiatives.
The business will have a total capitalisation of Rs 1,73,000 crore and will house all of Reliance telecom and digital functions.
This also means that after the transaction is complete, the Wholly owned subsidiary will hold 100 percent equity in Reliance Jio and Jio will in effect be a subsidiary of the new company.
The liabilities of Jio, i.e Jio's debt will be transferred to Reliance Industries and the wholly owned subsidiary, housing all digital platforms, will be a debt free entity, barring Reliance Jio's spectrum liabilities. Subject to approvals, Reliance Industries hopes to complete the transaction by March 2020.
Reliance strategy can be explained in three simple ways-
1)Mirror global peers: Reliance wants to mirror the likes of global giants like Alphabet, Amazon, Tencent, Alibaba and others which have a strong market cap and low net debt to equity ratio. It aims to create a financial structure that replicates and is in line with global technology peers. 2)End to end globally relevant digital capabilities: Like global giants, Reliance wants to create a digital and connectivity ecosystem in India which will not only house Jio but will also hold new fast growing areas like NB- IOT, Blockchain, Edge Compute, Mixed reality, Education, Healthcare and Agriculture. 3)Attractive for strategic & financial investors: In its investor presentation, Reliance has explained that after its last Annual General Meeting, which saw its Chairman Mukesh Ambani outline his vision for all its consumer businesses, it has received strong interest from strategic and financial partners. Bringing in a strategic or even a financial partner will mean more muscle to Jio in not just the 5G auctions but even surviving the current volatility in the telecom market and staying ahead of the game. What all businesses will be a part of the Wholly Owned Subsidiary (WOS)?
The biggest part of the Wholly Owned Subsidiary will be Reliance Jio, including its wireless, home broadband and enterprise broadband services, but it will also house its digital services like Myjio, JioTv, JioSaavan, Jiocinema, Jionews, Jio cloud, Jio Switch, Jio Net, Jio Security and Jio Health Hub. Reliance has also invested in consumer, digital and start up companies that will become a part of the WOS. This will include companies like Haptik, Radisys, Hathway digital and cable TV, Tesseract, Reverie, KareXpert, Kaios, Easy Gov, Sankhya Sutra Lab. So by the time the WOS is created it will have a wide range of digital capabilities aside from wireless communication. It will have big data, Artificial reality/ Virtual reality, block chain, edge computing, super computing, IOT, Robotics, Comp Vision, IaaS/ PaaS, Secure Identity and connectivity.
What could this mean in the long term?
CNBC TV18 spoke to a few analysts to decode what the end game may be. Analysts say the most likely scenario in the long term, which is anywhere between 4-7 years, to create a strong market capital for the Wholly owned subsidiary that houses Jio, which doesnt just have Jio but also all digital services. Making it attractive to investors, in a few years time it will bring it could bring in a strategic or financial partner and eventually demerge the wholly owned subsidiary from RIL and list the subsidiary on the Indian and/ or global stock exchanges.
To simplify the fine print of the financial transaction lets divide this into the key steps:
The Financial Fine Print: Reliance industries will first create a owned 100 percent Wholly Owned Subsidiary (WOS). RIL will then give Rs 1,08,000 crore to WOS via a rights issue of Optionally Convertible Preference Shares (OCPS). So RIL gives Rs 1,08,000 crore capital to WOS and in return WOS issues OCPS to RIL. The wholly owned subsidiary then gives that capital of Rs 1,08,000 crore to Jio against which Jio issues OCPS to the subsidiary. This means that Reliance Jio then gets the capital from WOS in return for the OCPS. Reliance Jio then transfers liabilities of Rs 1,08,000 crore to RIL through scheme or arrangement, along with consideration received out of OCPS. Effectively capital comes back to Reliance Industries and Jio become a subsidiary of the WOS. This means that Reliance Jio is giving Rs 1,08,000 crore capital to RIL and RIL is then assuming Jio's liabilities. Jio is then left with zero debt and only spectrum liabilities and some amount of working capital (amount unclear right now). Between RIL and Reliance Jio it is capital that is moving and the issuance of OCPS is via the wholly owned subsidiary. The transaction between the WOS and RIL is Rs 1,73,000 crore of which RS 1,28,000 crore is OCPS and Rs 45,000 crore is equity which is mirroring what it was in Reliance Jio. In addition, WOS buys equity of Reliance Jio worth Rs 65,000 crore from RIL and in return WOS gives RIL Rs 45,000 crore Equity and Rs 20,000 crore of OCP. Hence the total capitalisation in digital services or the WOS is at Rs 1,73,000 crore (including existing Rs 65,000 crore).
Reliance Industries has clarified the salient points of impact for shareholders in its investor presentation.
What this means for shareholders: The move will have no impact on the value pre and post the re-organisation for any shareholder. There will be no impact on the consolidated debt of Reliance Industries; the impact will only be on a standalone level. At the same time, RIL's standalone credit profile given its cash flow position and conservative leverage will not see any change. The consolidation of liabilities in RIL creates and efficient structure to manage cash. RIL also says that the re-organisation will enable monetisation opportunities accrue to shareholders efficiently. Disclosure: Reliance Industries, the promoter of Reliance Jio, also controls Network18, the parent company of CNBCTV18.com