An ongoing firm may initially combine different SBUs under one subsidiary to create and maximise synergies in the vertical. This may have occurred due to historical acquisitions in its growth path or generic diversification. After acquiring scale and a foreseeable steady cash flows, the SBU may get listed as separate entities with capital restructuring including induction of new shareholders.
A real life example is brought to students of Strategic Management where value addition occurred from conglomorate growth during late Dhirubhai Ambani (1966-2002) and then a reversal of strategies by spinning off SBUs in individual verticals for scale, growth during Mukesh Amabani regime(2002-2020), a period of 55 years in all.
Part B: Reliance Industries Ltd
Reliance Commercial Corporation was founded in 1966 as s
polyester firm. In 1973 the company got renamed as Reliance Industries Ltd followed a strategy of building its presence along all points on the value chain. Concepts of Scale & Financial Innovations like Tripple Option Convertible Debentures, GDRs, 100 year Yankee bonds etc were part of their strategy at that time. Under the late Dhirajlal Hirachand Ambani (Dhirubhai Ambani), the strategy was to float new ventures to raise capital
from the public, and then folding them back into the mother ship to consolidate
resources and market value in a multi-business operating company. RIL now has
oil exploration and gas, petroleum refining, petrochemicals, textiles, retail
and telecom under one company. It won’t remain so by the early part of the next
decade .(Aug 2019) Reliance
group with a market capitalisation of over Rs 41,000 crore, remained India’s
largest private sector group in 2002. On an original investment of Rs 1,000 in
Reliance’s equity, an investor would have earned a total of over Rs 1,64,000
over the period, implying a CAGR of 43 per cent.(Jul 2002). Then it started embarking on it journey from 'well head to wall socket'
An investment of Rs 1,000 in RIL shares in 1977 has
turned to over Rs 16.50 lakh in 2017. That roughly translates to an investment
of Rs 10,000 would have given a return of Rs 1.6 crore. The market capitalisation has
multiplied from Rs 10 crore in 1977 to over Rs 9.5 lakh crore or 95,000 times
by 2019.
The Vimal brand and the related textile business was
sold 49% to Chinese textiles major Ruyi December 2014. Reliance
when went in for massive investment in two major consumer-facing forays,
Reliance Retail and Reliance Jio, it has taken on massive loads of debt. From a
zero-debt company just a few years ago, Reliance reported Rs 274,381 crore of
debt in the December 2018 quarter. Net of cash and related balances of Rs
77,933 crore, the net debt position was Rs 196,448 crore. At a rupee-dollar
exchange rate of around Rs 70, that works out to $28 billion. Excluding the
cash assets, the gross debt in over $39 billion. (Aug 2019).
The only diversified multi-sector Indian enterprise with
three major growth engines in one single corporate entity — oils-to-chemicals
division, Jio (in telecom) and retail, have done exceedingly well in 2018-19. Reliance is pursuing its strategy to grow, by leveraging its existing know-how and
asset base and investing in opportunities strategic to its existing businesses and those of the future.
RIL was
embarking on its most ambitious value creation strategy, at the heart of which
would be partnerships with global players who would be inducted as strategic
partners in various businesses.
At the company’s 42nd Annual General
Meeting, Ambani announced a deal to sell a 20 per cent stake in its
oil-to-chemical business to Saudi Aramco, and said RIL would look at strategic
partners for retail and telecom and eventually list those. The deal with Aramco will cover all of RIL’s
refining and petrochemicals assets, including 51 per cent of the petroleum
retail joint venture with BP.“We have committed that this business would be a
standalone entity in five years. If then RIL and Aramco decide it should be
listed at some later time, they may do so; there is no decision yet,” executive
director PMS Prasad said.(Aug 13, 2019). Under the
brand Jio-BP, 49% stake in the 1400 –odd
petrol-pumps and 31 aviation turbine fuel(ATF) stations owned by Reliance BP
Mobility Ltd(RBML) for $1billion is sold to
BP plc.(10/07/2020).
The new joint venture
aspires to provide consumers with advanced fuels with lower emissions, electric
vehicle charging and other low carbon solutions over time. RBML is also
committed to the decarbonization of its own operations as well as that of its
wider ecosystem.
Reliance Jio since its launch in September 2016, Jio
offered low-cost data plans that forced all incumbent telco players to
significantly cut rates. In fact, Jio had offered free services for the first
three months. Jio reached a subscriber base of 100 million in just 170 days
since its launch.
In fact, Jio had offered free services for the first
three months. Three years after its launch, Reliance Jio is now the largest
telecom player both in terms of revenue and market share. As per the latest
TRAI data, Reliance Jio has the subscriber base of 36.9 crore. It's market
share has also grown to 34.9 per cent in the second quarter of FY20. This is
the highest when compared to other players. This also led to a consistent
decline in the subscriber base of Vodafone Idea Ltd and Bharti
Airtel.(Feb 13, 2020)
Reliance Industries has announced consolidation of
its media and distribution businesses into a single entity, Network18.
Under the Scheme of Arrangement, TV18 Broadcast, Hathway
Cable & Datacom and Den Networks will be merged
into Network18 Media & Investments. The restructuring will create
value-chain integration and render substantial economies of scale. It will also
simplify the corporate structure of the group by reducing the number of listed
entities.
"The broadcasting business will be housed in
Network18 and the cable and ISP businesses in two separate wholly-owned
subsidiaries of Network18,"
"The aggregation of a content powerhouse across news
and entertainment (both linear and digital) and the country's largest cable
distribution network under the same umbrella shall boost efficiency and exploit
synergies, creating value for all stakeholders... The reorganisation furthers
the group strategy of building a media powerhouse that is agnostic across
pipes, platforms and screens," it said.(Feb 17, 2020)
Reliance Industries (RIL), India's largest private
company by market value, has initiated a re-amalgamation process within the
company by spinning off assets and balance sheets to form an umbrella of
independent companies. The move is targeted to facilitate the planned strategic
investments in group businesses - Reliance Jio, Reliance Retail, refining
and petrochemicals.
A couple of months back, the retail business firms of RIL
- grocery, lifestyle and fashion, digital, and the e-commerce business JioMart
- have been parked under Reliance Retail Ventures Ltd (RRVL) as part of the
restructuring. Mukesh Ambani-controlled firm has created a subsidiary
in October last year to bring together all the digital and mobility businesses
under a company, called Jio Platforms Ltd (JPL). RIL has been planning to bring
strategic investors in these businesses.
JPL has become the parent of Reliance Jio Infocomm, and applications like MyJio, JioTV, JioCinema, JioNews and JioSaavn, besides content-generation ventures. But it will be a direct subsidiary of RIL. Thus, Reliance Jio will become a step down subsidiary of RIL. For making JPL debt-free, the parent company has infused Rs 1.08 lakh crore in it. They want to build JPL like Alibaba and Google, which claim high valuations in the stock markets.(Feb 19, 2020)
RIL has
plans to hit the capital market with initial public offers for Reliance Retail
and Reliance Jio Infocomm to list those separately by 2024. Before that it may
induct strategic investors in these businesses. The move is seen as a precursor
to carving out different companies from Reliance Industries. Analysts said this
strategic plan would help the company deleverage its balance sheet. They also
speculated that it could be a part of the company’s long-term succession plan.
The
journey from a zero-debt company at the start of the decade to a high-debt
company now, and a return back to the zero-debt stage by the first half of the
next decade marks a tremendous success journey for the Ambanis, if all things
work out. In the process, a conglomerate which housed all its unconnected
businesses in one company will have floated off separate businesses into
discrete companies that will be easier to understand for analysts. It will be
the exact opposite of what founder Dhirubhai Ambani set out to do. Mukesh
Ambani will realise tremendous value for himself and his shareholders in the
process.
1.
What is meant by
portfolio restructuring
2.
What are the popular
modes of portfolio restructuring
3.
Capital structure
change is not a form of company restructuring. Do you agree ? Explain
4.
How did RIL
restructure its portfolio of SBUs
5.
Portfolio
restructuring is zero sum. Do you agree? Explian
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