Mukesh Ambani’s $2 chutzpah unlocks another fortune

Andy Mukherjee / Bloomberg September 11 | Updated on September 11, 2020

Mukesh Ambani   -  Bloomberg

Woos marquee investors to his retail business

Mukesh Ambani has joined the league of the world’s richest with the help of a simple formula: assembling admirers for $2 businesses. First he got Facebook Inc and Google to back his fledgling digital ambitions, and now he may be trying to entice Inc into his retail venture, already India’s largest.

In four years, the billionaire has amassed roughly 400 million customers for his mobile data business. What does Ambani eke out from each of them? Less than $2 a month. The chump change didn’t deter Facebook and Google’s parent, Alphabet Inc. Together with marquee private equity investors and sovereign wealth funds, Silicon Valley tech titans made a beeline recently to invest in Ambani’s Jio Platforms Ltd, valuing it at about $65 billion.

Fund-raising spree

That $20-billion fund-raising spree has already met the refining and petrochemicals czar’s goal of making his flagship Reliance Industries Ltd net-debt-free, giving it enviable financial strength just as the coronavirus pandemic is taking a toll on most other balance sheets. The tycoon wants a repeat performance for another $2 business in his stable: retail.

He has offered a 40 per cent stake in Reliance Retail Ventures Ltd. to Amazon, Bloomberg News reported on Thursday.

ALSO READ Reliance ‘to offer $20-billion stake in retail arm to Amazon’

It’s unclear if Jeff Bezos will bite. But others have. Menlo Park, California-based Silver Lake Partners, which bought a stake in Jio, has written a $1 billion check for 1.75 per cent. Another Jio investor, KKR & Co., is also probably coming on board.

To see how the excitement is rising once again over a princely $2, consider Reliance’s 30 million square feet of retail space. Each square foot, analysts expect, will garner $2 a day by 2022. On an operating margin of 7 per cent, that translates to $1.5 billion in earnings before interest, taxes, depreciation and amortization. All Ambani had to do was to convince Silver Lake that this Ebitda is worth 38 times today. And with that, he unlocked the gates to a $57-billion enterprise.

If the Facebook deal for Jio is any guide, Amazon as a strategic partner might get its 40 per cent for a small discount to what Silver Lake paid, though the reported $20 billion price tag is still formidable. Excluding his $38-billion divorce settlement, Bezos hasn’t done a transaction as large as this. There’s another wrinkle. Amazon India, in which he has already committed billions of dollars, competes with Reliance Retail’s physical stores as well as with Ambani’s version of phygital retail.

Bezos’ dilemma

But on his own, Bezos must fight with one hand tied behind his back. Foreign-owned e-commerce sites, such as his or Walmart Inc’s Flipkart, must operate as pure marketplaces for third-party sellers. The law against owning inventory has become stricter, with discounts triggering allegations of favouring connected parties. India’s competition commission received a fresh such complaint from a group of Amazon vendors recently. Being an Indian company, no such restrictions apply to Reliance’s grocery stores,supermarkets, or JioMart, Ambani’s vision of virtually connecting 30 million neighbourhood shops with his telecom customers.

Although still untested, the latter is his edge. The bulk of the 20-fold growth that India’s online grocery sales might witness over the next five years may go to the Jio-Facebook partnership, Goldman Sachs Group Inc estimates. The advantage for Ambani could also carry over to higher-margin items, the same way as Costco Wholesale Corp’s popular $4.99 rotisserie chicken helps the American retailer sell a little more of everything from apparel to flat-screen TVs.

Future is in the bag

Covid-19 has been a shot in the arm for Reliance, despite retail Ebitda of only $145 million in the June quarter, a 47 per cent drop from last year. The carnage from a nation-wide lockdown allowed it to swoop on debt-strapped rival Future Group’s retail, wholesale, logistics and warehousing units, acquiring the lot for just $3.4 billion. More importantly, the prospect of getting stuck with sub-5 per cent growth in the post-pandemic economy is making Prime Minister Narendra Modi’s government reliant on an increasingly small number of domesticgroups to pull India out of its tight spot.

Unlike China, India’s billion-plus consumer market has been open to US tech firms. But when Ambani requested Modi last year to end data colonisation by global corporations, it became clear that a shift was coming. Any remaining doubts have been removed by the post-Covid surge of economic nationalism.

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Published on September 11, 2020
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