Another day, another Jio Platforms deal — RIL steps on the gas to cut debt

Another day, another deal, another step towards balance-sheet deleveraging.

In its third major stake sale announcement in Jio Platforms in less than three weeks, Reliance Industries (RIL) roped in a new investor — Vista Equity Partners, a US-based private equity firm focussed on software and technology investments.

Vista’s investment of ₹11,367 crore for a 2.32 per cent stake pegs Jio Platforms’ equity value at ₹4.91 lakh crore and its enterprise value at ₹5.16 lakh crore. This is marginally higher than what the about 1 per cent stake on Monday (May 4) to another US-based private equity firm Silver Lake implied — equity value at ₹4.90 lakh crore and its enterprise value at ₹5.15 lakh crore.

In finance parlance, the enterprise value of a business is its equity value plus debt minus cash.

The Silver Lake deal, and now the Vista deal, represent a premium of about 12.5 per cent to the equity valuation of the Facebook investment in Jio Platforms that was announced on April 22. Facebook will be paying ₹43,574 crore for 9.99 per cent in Jio Platforms. The valuation of the Facebook deal itself was 10-15 per cent higher than what many analysts were earlier estimating.

Top dollar deals

In short, with about ₹60,596 crore raised from 13.45 per cent stake sale, RIL has been able to rake in top dollar for its holdings in Jio Platforms. More such deals seem likely in the coming weeks and months.

Indications of continuation of the deal momentum in Jio Platforms were given in last Thursday’s March 2020 quarter results announcement by RIL. The company had said that in addition to the Facebook investment, it has received strong interest from other strategic and financial investors and is in good shape to announce a similar-sized investment in the coming months.

The follow-up with the Silver Lake and Vista deals has been quick. More deals for stake sale in Jio Platforms could be on the anvil, going by RIL’s statement last Thursday on ‘interest received for similar sized additional stake’ (as the Facebook deal)’.

So, more deals to sell another 6.5 per cent or so in Jio Platforms cannot be ruled out, even if the timing and valuation remain uncertain. After these deals, RIL could likely retain about 80 per cent in Jio Platforms. This will further reduce, as and when RIL decides to list Jio Platforms through an initial public offer (IPO). The recent deals could be preparing the ground for an IPO in the not-too-distant future. RIL currently holds 100 per cent stake in Jio Platforms and after the deal consummation with Facebook, Silver Lake and Vista will hold about 86.5 per cent.

Debt cut drive

The stake sale deals in Jio Platforms over the past few weeks, along with the upcoming rights issue of ₹53,125 crore and the previous investment by British Petroleumm should help RIL in its stated objective of raising capital of over ₹1.04 lakh crore by the June 2020 quarter, and becoming net-debt free by March 2021. The company’s net debt (debt less cash) as on March 2020 was about ₹1.6 lakh crore. The company’s debt-to-equity ratio as of March 2020 is 0.74 times.

Three deals in in Jio Platforms in quick succession and the likelihood of more to come seems indicative of Reliance Industries (RIL) pressing the accelerator on its debt reduction and balance-sheet deleveraging plans.

Stock rallies, valuation jumps

The market seems pleased, with the RIL stock gaining 3.6 per cent on Friday to close at ₹1,562 a share, compared with the 0.63 per cent rise in the Sensex. The stock has rallied close to 77 per cent from its March 23 low of ₹884 and is now within kissing distance of its December 2019 peak of ₹1,610. A good part of this rally is attributable to the stake sale deals in Jio Platforms.

The RIL stock’s valuation too has vaulted. The company’s consolidated profit in the recent March 2020 quarter was down about 37 per cent y-o-y due to inventory write-down as a result of the oil and petro-products price crash. This, accompanied by the strong rally in the stock, has taken the consolidated trailing 12-months price-to-earnings ratio of the stock now to about 25 times, compared with the three-year average of about 19 times.

Excluding the one-time inventory write-off, the stock’s valuation will moderate somewhat though it will still be above historical averages. The proposed rights issue price of ₹1,257 a share will be at a discount of almost 20 per cent to the current stock price.