(ATF) After a flurry of billion-dollar deals in recent weeks, news has emerged that India's Reliance Industries is offering to sell a roughly $20 billion stake in its retail arm to Amazon.com.
This was a shock development, reported by Bloomberg, because the oil-to-telecoms conglomerate led by billionaire Mukesh Ambani has already raised $20 billion this year from investors including Facebook and Google.
It was widely believed that Ambani was putting together a retail conglomerate that would compete against Amazon. But the reports late on Thursday said that Asia's fifth richest man was willing to sell an up to 40% stake in his retail business to Amazon.
While Amazon has not commented on the reports, RIL though, in an official response today, termed the reports "speculative".
Regardless, after attracting the world’s largest tech investor to its retail business as well this week, Ambani has clearly turned his focus toward retail after successfully building India's top telecom network, in terms of customers in less than four years, hoping to take a dominant position as India's huge consumer market comes of age.
Reliance Retail, which has close to 12,000 stores selling a wide range of products, acquired rival Future Group's retail arm last month and on Wednesday announced a $1 billion investment from Silver Lake Partners.
Shares in Reliance were up sharply since yesterday after hitting a record intra-day high. The company earlier on Thursday became the first listed Indian firm to cross $200 billion in market capitalisation.
Big leap into retail
After raising $20 billion from global and marquee investors like Facebook, by selling stakes in the digital business arm of his flagship Reliance Industries’ Jio Platforms, Ambani, who has a net worth of $82.5 billion, recently kept another promise he made in his latest fund-raising spree. That was to start firing the growth engines of Reliance Industries (RIL)’s retail venture for the next big leap.
In RIL’s annual general meeting mid-July, Ambani said that the group's retail venture had received strong interest from strategic and financial investors and he “will induct global partners and investors in RIL’s retail arm in the next few quarters.”
On Wednesday he walked the talk by announcing that the retail arm Reliance Retail Ventures Limited (RRVL), sold 1.75% of its equity stake worth $1 billion to private equity giant Silver Lake.
The investment valued RRVL at a pre-money equity value of a huge $57 billion, RIL said in a stock exchange filing after the announcement.
The investment by Silver Lake, that by pumping in $1.36 billion (for 2.08% stake) in Jio was also the first US private equity firm to invest in a RIL arm, not only underscores Ambani’s promise to lead a disruptive, technology-led transformation of Indian retail sector. It also sets RIL’s retail venture as the next investment trigger for Ambani after Jio.
“The deal establishes a valuation for its retail arm and sets the stage for further stakes sales within the segment,” global credit rating firm Moodys said in a comment.
Silver Lake, after all, has a terrific track record of investing in some of the largest and successful tech companies globally such as Twitter, Airbnb, Alibaba, Dell Technologies, ANT Financials, Twitter, Alphabet’s Waymo and Verily among others.
Feeding hungry global investors
And, even before the ink of the Silver Lake deal has dried, RRVL is already emerging as the juggernaut for wooing other potential investors.
According to reports, RIL has started preliminary talks with Facebook and private equity fund KKR, that bought stakes in Jio too, for pumping money in RRVL.
The two were among the 13 that have invested in Jio for over 30% of its shares. Other notable investors that have followed KKR to grab stakes in Jio included Vista Equity Partners, General Atlantic, Google, and Abu Dhabi's sovereign wealth fund Mubadala.
“It (global investors’ interest in RRVL) is expected because right after selling stakes in Jio, Ambani had hinted about using the RRVL platform for raising funds, which is logically the next step,” Ankur Bisen, head of consumer and retail practice at Technopak, that claims to be India's leading management consulting firm on retail space, told ATF.
“Looking deeply, RRVL is truly an emerging market story that has the credentials of RIL, the largest company in the private sector, which is also the market leader by far, in retail and telecom,” Ankur added.
RRVL, claims RIL, operates India's largest, fastest-growing and most profitable retail business spanning supermarkets, consumer electronics chain stores, cash and carry wholesale business, fast-fashion outlets, and online grocery store JioMart. It operates almost 11,000 stores in nearly 200 cities.
Late last month, RIL acquired the retail and logistics businesses of Future Group for $3.4 billion, which lifted its retail presence by adding close to 1,800 of Future Group’s stores spread across 420 cities.
With the Future Group acquisition RRVL now commands a third of the bricks-and-mortar stores in the organised retail sector.
The investment will add fire to Ambani's battle for dominance in the retail market that is also being eyed by Jeff Bezos' Amazon.com and Walmart Inc's Flipkart.
In May, RIL launched an online grocery delivery service JioMart. It has also tied up with WhatsApp to connect customers with local Kirana stores.
“Small wonder that RIL’s global investors are hungry for stories like RIL offers; a local company from an emerging market that operates on a global scale backed by the two hottest emerging market themes of telecom and retail,” Bisen added.
Daunting journey ahead
Nevertheless, while RIL may have overcome the challenge of raising funds, it still faces the daunting task of the next phase; that is to start fulfilling the promise of operations, delivery and expansion, experts say.
“What we see is creation of a unique business model,” Ankur of Technopak said. “Nowhere in world will we find an entity which is a market leader in telecom as well as retail, both huge growth stories of emerging markets.”
However, it is also a business model that is emerging on investor capital, so there has been a promise to grow “by say X percentage over say an X period of time” the retail expert said.
“The next step then, is to perform on that promise, which has two components. On the Jio platform it is delivering services, which is an easier thing. But to deliver on retail is more complex, because that involves physical merchandise, which in turn involves an efficient supply chain and huge infrastructure, as well as satisfying the diverse demand of a diverse population like India,” Ankur added.
“That’s a tricky ask. So how Ambani’s promises unfold is going to be an interesting thing to watch,” he concluded.
Meanwhile, according to a Moodys analysis, the Silver Lake investments, which enhances net cash-surplus status will also enable RIL to pursue further growth opportunities while maintaining its zero-net debt status.
With reporting by Sachin Ravikumar for Reuters. This report was updated on Friday Sept 11.