Opportunistic deal

with limited Downside

Welcome to our Original series at the duologue. The reading time to finish this one is around 12 mins.  

The Duologue is a concerted effort by Vivek and Bheem to make sense with a unique lens. Now, on to the post!

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Dear Bheem,

The Reliance-Facebook(FB) deal has been covered diligently even in these times. Yet, there is a simple narrative and angle that most of the coverage I read never emphasised. It was covered as co-joining of two behemoths for the future along with rationalisation of debt that Reliance surmounted for its aggressive play with Jio. These reasons make a ton of sense but nothing that Reliance does initially looks reasonable in the first place, so let’s unpack.

Highligths and Possibilities

• FB and Jio partnered to launch Jio mart store which will let local kirana stores cater to online customer orders through WhatsApp. 

• The chat and commerce will be handled through WhatsApp with payments being powered by UPI, if and when WhatsApp receives the nod from regulators. 

• Jio will manage the store side digital offering by helping the Kirana stores receive orders and deliver the orders. 

In order to realise this collaboration FB invested: 

Today we are announcing a $5.7 billion, or INR 43,574 crore, investment in Jio Platforms Limited, part of Reliance Industries Limited, making Facebook its largest minority shareholder.

Further rolling out the biggest rights purchase scheme with a discounted 14% stock option value: 

Mukesh Ambani's Reliance Industries Ltd (RIL) on Thursday said that it will raise Rs53,215 crore through a rights issue, the biggest equity fundraise ever seen in the Indian capital markets.

Since the start of this writing, Silver lakes invested $750 million for a minority stake in Jio Platforms.

Private-equity firm Silver Lake has struck a deal to invest $750 million in Indian telecommunications and technology giant Jio Platforms Ltd., the company said early Monday(04/05/2020) India time.

This was done at a 12.4% premium to the valuation of Jio platforms with the FB deal. 

You can learn all about recent fundraising by following the media coverage where they dissect all the details of each investment. 

This doesn’t completely derail my take but is an important announcement that should be accounted for the analysis. 

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Context

It’s been 5 years into telecom and Reliance has pumped in massive amounts of capital to fund its telecom venture, Jio. This came with a huge overhead of debt that was used to gain market access.  Results are conclusive as of this writing, Jio is left with two only competitors and on its way to make majority of it’s 388 Million subscribers into paid subscribers.

Telecom sector has clearly reached a saturated state and only requires further investment of capital if and when 5G comes to India. 

In view of this Reliance decided to start shedding parts of the telecom that were mature and have no exponential growth in the future, the telecom tower business was offloaded to outside PE ( Private Equity ) firms looking for stable growth business.

At the Closing of the Transaction, the Trust will own 100% of the issued and paid up equity share capital of Reliance Jio lnfratel Private Limited (“RJIPL”). RJIPL has a current portfolio of approximately 130,000 communication towers that forms the infrastructure backbone of Reliance Jio Infocomm Limited’s (“Jio”) telecommunication network, with plans to build additional towers and the total number of towers is expected to reach approximately 1,75,000 towers. Jio is an anchor tenant of the tower portfolio under a 30-year Master Services Agreement

Jio shifted its focus to the stack above the network layer, Application. Quoting from the previous (2019) shareholder letter :

CREATING AN INDIAN DIGITAL ECOSYSTEM
We are making a strategic transition by creating multiple platforms across consumer business, agriculture, education and healthcare that will accelerate our growth. In addition to its own digital platform, in the past year, Reliance has partnered with more than a dozen coming-of-the-age businesses. These are mostly in the Technology, Media and Telecom (TMT) and retail sectors, along with strategic investments in two major MSOs – Hathway and Den. Reliance believes that creating an ecosystem with new-age entrepreneurs will help unleash the potential of India’s vast human capital.

Reliance, aware of the probable pitfalls of being just a carrier decided to roll up its sleeves and get cracking at building a suite of services in the Application layer. 

Not a novice in any sense to the market and needs of India, Reliance’s Jio started accumulating the content stack needed to keep people engaged and use its data services. By investing heavily in building the initial set of Jio apps like TV, music & chat, it started on the right foot. 

In order to create a new set of demand(first time mobile users), Jio worked with device makers and android based companies to have a custom mobile( Jio Phone) and OS ( Kai Os initially then a custom version with Google) built for its phones. This created a new and captive demand needed to dominate the market.

For the first 2 years, Jio was entirely focused on consumer applications and made various collaborations and acquisitions on this line. One of the significant ones being Saavn’s acquisition for a $104 million and merging it with Jio Music. 

Source : Presentation of Jio Infocom

The culture and communication can be given away for free, but not the network of relationships built on an existing platform. Though, in these five years, Jio has reached 388 million subscriber count, meaning everyone owning a Jio phone is also a Jio chat customer. Yet, i have never received a Jio chat. 

Meanwhile, Telecom industry has contracted in this timespan to just 3 service providers with at least ones future uncertain in days ahead. So, the thinking would have been What More?

Commerce: The Real Money

The numbers look daunting but not the revenue, this is the catch with consumer products. In order to reach the scale they need to be free, engaging and advertisement driven. You can hope to make a tik tok but making it is an another challenge in itself. Jio doesn’t have either the skill or the culture to build such a product out of their team, filled with telecom experts .

Retail has been an elusive target for Reliance since the beginning. It has one of the largest private store retail chain across supermarket, clothesline and electronics. It is not for the lack of trying that Reliance didn’t venture into online commerce in a significant way. There was even a development team that had been working on innovative solutions out of Texas, USA. They have been trying and planning this since 2018:  

Insiders have said that Reliance’s big plan is to integrate its retail network with Jio users by offering discounts and bring in tie-ups with consumer brand. It is already in talks with kirana stores to use the Jio phone network and point-of-sale machine. “We will see how to put the couponing system onto blockchain,” said the second source.

I am not sure when they gave up on the plan to build it out on their own but in the following year (2019) they started picking up startups off the block.

• Fynd : Local to Online Commerce 

• e-dream Edusoft : Online Education tool named Funfoot

• Haptik : Chatbot AI tool 

• Nowfloats : Local business discovery. 

All of these companies form the parts required for Reliance’s future commerce play. They pivoted to making the small scale Kirana stores as the centre of their retail future by leveraging the scale and ease of Jio digital tools. 

Jio becomes the de-facto platform through which Kirana stores buy from its suppliers ( FMCG companies ) and also sell their products to customers, both online and offline. 

Pandemic Interruption: Opportunity unlocking

Since the end of March, when the entire country closed down including e-commerce ( except essentials), it was the Kirana stores that were functioning as the only channel for majority of India. 

If there is one thing you need to understand when it comes to Reliance industries success in the past is that they seize every opportunity that comes their way, even in a crisis. I can write a post altogether outlining the instances where they benefited when every one else was measuring their loses. 

Post the pandemic, Kirana stores will be the backbone of economy but at the same instance be the most vulnerable due to depleting cash reserves and uncertain demand spikes or drops. 

Currently there are about 12 million stores that are on a scale between very vulnerable to shaky at best. They would be looking for a helping hand to get out of this havoc. Waiting in the wings is Jio, which will help you manage your inventory through Reliance retail, enable digital orders through Jio POSS and help you sell online with Jio Mart.

The Whatsapp’s integration with Jio Mart will help the Kirana stores to deliver to nearby customers. Jio will also provide the store owners some leeway to let them tide over the rough patch they find themselves in by extending credit and cheaper supplier rates from factories.

Positioning of this collaboration is contrasting to its previous attempts in this space, it is no more the behemoth taking over but rather a saviour helping out small businesses. The jury and journalists are out to see if it really takes off or fizzles out. 

Fictional Depiction: Coming down to Personnels 

Picture Mukesh Ambani looking through one of the glass panes from the top floor of his Antilia house. He is looking over the uncanny mumbai that is eerily quite due to pandemic. He has his executive sitting in the room, physically distant of course, talking him through all the scenarios and ways they can benefit out of this pandemic. It's time for his commerce play with Jio Mart to come to fore. But there are some hurdles along the way,  the company has ₹ 1.5 trillion debt on its books, also Mr Ambani publicly has stated to offload this debt at the earliest. 

Commerce after pandemic will need huge funds to stimulate the sector. They have done it once with Jio and they are bound to do it again with Jio Mart now. Unlike a narrow segment(telecom) with single digit competitors Mr. Ambani is looking to take on an entire sector that comprises of companies ranging from pure play e-commerce giants to payment enablers to credit companies all at once. But, Jio has been at this through the policy angle by influencing the draft e-commerce heavily. For a detailed take, please read this post in its entirety. Quoting from the piece indicating Reliance’s motivations: 

Prasad, the corporate affairs executive, made Reliance’s intent very clear during the meeting when he stated India was already late with a consistent ecommerce policy. “This is not about offline or online, digital is for everyone… (the government) has been long on prescription but fallen short of enforcement and execution, which shouldn’t happen,” he told the packed room, according to an ecommerce company executive. The attendees included government officials.

Short on time and multiple entities to tackle, Mr Ambani would prefer a faster adoption and cheaper option to be his play in the commerce sector. He instructed his team to make the call and give the lurking FaceBook a go ahead and draft the immediate implementation plan with Whatsapp for Jio Mart roll out. 

Tring Tring…..

Receiving the call in his own 70 Acre Mansion in Bay Area, Mr Zuckerberg would have been pleased with the news about Jio accepting the possibility of a partnership. This was long time in the making for Mr Zuckerberg who has a feeling that he is constantly at war with the world. During a recent earnings call , he iterated :

Mr. Zuckerberg seemed done with apologies. Facebook in the past hadn’t communicated its views clearly “because we were worried about offending people,” he said. “My goal for the next decade isn’t to be liked but to be understood.”

In India, things haven't been smooth with his deputies working hard to make their biggest market in terms of MAU's ( Monthly Active Users ) become a cash cow. A chart outlining the recent filings shows the ARPU ( Average Revenue per User ) for Asia Pacific saw 21%  growth in revenue  ( $3.06 ) from last year ($ 2.78 ). 

Advertising revenue on FB infrastructure in Asia-Pacific is not as lucrative a business as its North American region, though it has the highest growth. FB with WhatsApp has been in plans to monetise these users in one way or the other. It decided to go the payments way in 2017 and in 2018 made two appointees managing the India businesses of FB and WhatsApp.  

In an interview with FB India's MD, when asked about benefits from the deal with Jio Platforms for FB :

I think we played a fairly material role in fuelling the growth of small businesses. And, that continues... one of the big pillars of the strategy that we articulated for India last year was: ‘how can we do even more to fuel entrepreneurship and the growth of small businesses in India’... on the back of the investment in Jio Platforms, the two companies have agreed to look at working together to fundamentally open new doors for the digital ecosystem with a particular focus on small businesses.

[....]

With the Jio Platform investment, the first idea that we’re exploring is on WhatsApp. It could well be that over the next few months and years there will be ideas around Facebook and Instagram. But the first idea that we’re exploring is on Whatsapp because WhatsApp is encrypted, we are not able to see the messages, but we see it from observed behaviour that people use WhatsApp to communicate with their local stores, whether it’s the local kirana or the local pharmacy. It’s already happening.

This 2x2 outlines the intended goal with WhatsApp and Jio Mart integration for Facebook, both in terms of users and businesses. Facebook is desperate to turn WhatsApp into a utility that has high engagement. Google has been developing and launching more utility products in India than anywhere else. Clearly outlining the trend that digital advertising revenue out of Indian users is not enough to sustain the spend.

FB is marred in troubles with compliance and regulations in this region . Adding to that is the uptick of Tik Tok and local social media applications, only making it difficult to hold on to its existing users.

Alignment

Mr. Ambani and Mr Zuckerberg  are similar in many ways. Both are head strong and convinced about their vision, the only obstacle in their view is making others understand their view. Both are aware of the competition and quick to react to threats with either launching a copy cat or  buying it out. Also, both are in agreement with what they plan to get out of this deal, immediate impact with Jio and WhatsApp integration and the rest will be figured out later. Here is Mr. Zuckerberg from a recent earning call :

One aspect of online commerce I want to mention is the partnership we just announced with Jio Platforms in India. The largest Facebook and WhatsApp communities in the world are in India, and we think there's an especially important opportunity to serve small businesses and enable commerce there over the long term. By bringing together JioMart, which is Jio's small business initiative to connect millions of shops across India, with WhatsApp, we think that we’re going to be able to create a much better shopping experience. There's a lot more we can do here and I'm looking forward to making progress with the team at Jio.

and here is Mr.Ambani stating about the collaboration :

The synergy between Jio and Facebook will help realise Prime Minister Shri Narendra Modi’s ‘Digital India’ Mission with its two ambitious goals — ‘Ease of Living’ and ‘Ease of Doing Business’ – for every single category of Indian people without exception. In the post-Corona era, I am confident of India’s economic recovery and resurgence in the shortest period of time. The partnership will surely make an important contribution to this transformation.”

The benefit that Zuckerberg gets from this deal is the sudden disappearances of threats from the government. A golden chance to learn diplomacy that has been evasive to Mr. Zuckerberg since his time trying to enter China by learning Mandarin. 

We can keep going about the synergies that this deal could crop up for entities as well, but not very wise of us to do that at this point of time.

If there is any indication, Mr Ambani doesn't want to share the responsibilities with one single entity, hence the follow on fund raising rounds to not let any one own too much equity and leverage.  

The downside of the deal for Facebook is that it still benefits monetarily with a significant stake ownership if not the partnership. For Jio,  it is an opportunity to test its thesis without burning holes in their promoters pockets at the right scale. 

I have written in the past when writing about Facebook's Libra there is only one single point of failure, Mr Zuckerberg himself. It would be a real extravaganza to see him learn from the older generation leader on how to use it as a strength like Mr. Ambani has been doing since the beginning. It was a deal between two people in essence, two men who are very much alike except being separated by generations, sectors and regions. But their vision at the moment aligns and both are working to make it work at all costs. 

Regards,

Vivek

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The Duologue is an effort by Vivek and Bheem to have a dialogue about varying topics. 

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