Financial Daily from THE HINDU group of publications
Sunday, Dec 05, 2004
Corporate - Corporate Disputes
Understanding the Ambani squabble
S. Vaidya Nathan
At the core is securing unequivocal control over Reliance Industries' massive cash flows that can finance business plans and drive wealth accretion.
Reliance's three key business initiatives retail marketing of petroleum products, natural gas and telecommunications are set to catapult the company to a scale that would be significant even by its standards.
In the event, any delayed settlement would only make the exercise more expensive for Mr Mukesh Ambani. A settlement would end the uncertainty; a patch-up may be perceived only as a cosmetic exercise.
Factors such as Mr Anil Ambani's entry into politics, his association with the Samajwadi Party, his close links with the Sahara India Parivar, and his unilateral announcement of a big-ticket power project in Uttar Pradesh are all cited for Mr Mukesh Ambani taking control over the decision making at Reliance Industries.
But these may not fully explain the public squabbling. Yet what is clear is that if Mr Mukesh Ambani reaches a settlement soon with his brother, he would do it at a far lower price tag than he can five or ten years hence, for then the business profile of Reliance Industries would have grown dramatically larger. The following factors could have a bearing on the change:
Reliance Infocomm is likely to account for at least a fourth of this. With its nation-wide optical fibre network the company is well set to emerge the leader in the broadband business. Its initial public offering may be deferred till the ownership issues are settled.
This would ensure that in any division of wealth, this business is valued at less than the likely price that the stock could command; such a development would suit well Mr Mukesh Ambani, as he is widely perceived to be the brain behind the foray into telecom and controls Reliance Infocomm ownership through privately-held companies.
But even if production turns out substantially lower than the reserves, it would drive up the revenue and earnings potential. This would strengthen Reliance's presence in the fuel and energy space.
In FY 04, the cash flows from operations exceeded Rs 11,000 crore and the picture is bound to be healthier in this fiscal.
Consider the debt that can be raised on the strength of such cash flows and the potential for equity mobilisation (a skill the group has mastered over the past two decades), the available resources can create a business at least twice the present size of Reliance Industries. This is the reality-check on what is at stake.
Obviously, these issues have kept the rift on the front pages of newspapers and the prime television time. But what does all this mean for investors? A look at the possible outcomes and their implications.
If the former decides so, the latter may be left out on a limb with just the assets from any settlement to pursue his business ambitions but with no say in the manner in which Reliance's cash flows are used.
Quite apart from the larger consideration of business synergies, the Ambani family would largely be loath to see the break up of an empire built so assiduously by Dhirubhai Ambani over more than three decades.
Its gas-based power project in Uttar Pradesh is at risk. But this appears to be a mere skirmish in the larger battle.
In a settlement, Reliance Energy could be a part of the assets vested in favour of Mr Anil Ambani along with Reliance Capital, the mutual fund and insurance businesses.
A hefty cash component is also likely to be part of the package to compensate for any shortfall in the share that ought to go to Mr Anil Ambani.
The right to use the `Reliance' name for a defined period or indefinitely may also be integral to this process.
A legal battle would drag the process on for a longer period. It may also lead to a scrutiny of the group's business structures as has never happened in the past.
As such a denouement could be detrimental to the Group, the brothers may stay clear of such a course, except as the final option where one of the brothers sees the settlement offer as an inequitable one.
Every now and then, when it runs into impediments to business growth due to difficult political situation, it has successfully overcome it.
An involvement of political interests is possible, including efforts at bringing about a rapprochement. A truce brought about by political interests that merely perpetuates the status quo would be perceived as a negative as the issue could be re-opened if those who broker it become less relevant with changes in the political milieu.
Even if the brothers battle it out, Reliance shareholders should remain invested through the troubled times. Sharp price dips could be used to accumulate the stock. They can remain invested even if a compromise solution is found though this could affect the stock's price earnings multiple.
A similar strategy may be appropriate in the case of IPCL, which is likely to be a part of Reliance's long-term plans.
Shareholders of Reliance Energy could contemplate switching a part of their exposures to Tata Power, which is pursuing a similar growth strategy and now offers greater certainty on execution of business plans.
Shareholders of Reliance Capital should retain their holdings as it could be a critical with its investment portfolio and also because it is attractively valued.
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