FAQs: Six key questions on the Reliance Jio-Facebook deal

Reliance Industries Ltd, Jio Platforms Ltd and Facebook Inc today announced the signing of binding agreements for an investment of Rs 43,574 crore by Facebook into Jio Platforms. Who gets the money? What about valuation? Answers here

By Pooja Sarkar Forbes India Staff

Published: Apr 22, 2020 07:11:25 PM IST

Updated: Apr 22, 2020 07:20:53 PM IST

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Image: Himanshu Bhatt/NurPhoto via Getty Images

What is Jio Platforms Ltd?
Jio Platforms Ltd, a wholly owned subsidiary of Reliance Industries (RIL), comprises the group’s ventures into digital businesses—including apps, cloud services, artificial intelligence and so on, as well as Reliance Jio Infocomm Ltd.

Jio Platforms was incorporated on November 15, 2019, and RIL has infused about Rs 1.08 lakh crore in this business. Over the past few months, it has moved employees from other information technology departments (such as Reliance Corporate Information Technology Park Ltd) to this company.

So, what happened this morning?
Early this morning, Jio Platforms said it has agreed to sell shares to Facebook (subjected to regulatory approvals), after which Facebook (FB) will be the single largest minority shareholder in the entity, with a 9.99 percent stake. FB will also get a board seat and an observer seat in the company.

Who gets the money from Facebook?
According to the management, Rs 15,000 crore will straight away go to Jio Platforms and remain as cash on the books. The remaining Rs 28,574 crore will go to RIL as redemption of its optionally convertible redemption shares (OCPS).

What about valuations?
Facebook has valued Jio Platforms at an enterprise valuation of Rs 4.6 lakh crore (USD/INR70) on a pre-money basis. Pre-money means how much the company is worth before it begins to receive any money. It helps paint a clearer picture on the valuation of each share, and the current value of the business.

Simply put, the deal has been done two times price to book value and EV to invested capital is 1.8x. Analysts expect that the net debt including other liabilities at $5.8 billion in Jio Platforms but this stake sale will lower RIL’s net debt by 12 percent.

How does this help Jio and RIL?
With this transaction, Jio won’t remain just a telecom company, but will transcend into a technology company. Sources confirm to Forbes India, that the internal transition of IT employees has been happening since March. This entire IT collective will provide service not only to RIL group companies but outside too, opening new avenues for revenues.

The phygital (physical cum digital) platform will enable RIL to expand their reach, especially in the ambitious JioMart project to connect kirana stores to households.

As on December 31, 2019, the group’s net debt stands at Rs 1,531 billion and with this investment, it should put RIL on way to becoming net debt-free by March 21.

Also, with oil prices tanking across the world, there is no clarity on the Aramco deal, which was announced earlier. While this deal with FB is a binding offer, the Aramco one on the other hand is non-binding. The group is also undertaking its transaction with BP to expand its fuel retailing business.

How did the market react?
The street has been divided on their previous valuation of the Jio platform as compared to what FB has valued the firm; for example, CLSA in its note, said that “the implied valuation is slightly below our valuation of Jio but this should help in positioning Jio as a technology company rather than just a telecom operator.”

However, Morgan Stanley analysts wrote to their clients that it is 14 percent above its best case enterprise valuation but nearer to management guidance of $66 billion.

Abhimanyu Sofat, head of research at IIFL Securities Ltd, says, “With this deal, Jio’s revenue market share will increase as they have sufficient cash flow to battle it out. They are not dependent on the parent company for capital infusion towards implementation of 5G services.”

Sofat adds that over the last few months, Bharti had raised capital; now, Jio will also have sufficient money to battle it out.

Disclaimer: Reliance Industries is the owner of Network 18, the publisher of Forbes India