Yesterday's news from Reliance has confused the market - while everyone sees the implications of the announcement for RIL, the implications for ADAG are not as crystal clear.
Firstly, some background. Back in July-August 2005, when the split agreement was thrashed out, both brothers entered into a non-compete agreement. The duration of this agreement was for 5 years, and it prevented the brothers from stepping on each other's toes. So, in a sense, today's announcement is nothing special - the agreement was anyway supposed to expire in a couple of months.
Secondly, in reality, the non-compete agreement was in place only to protect Anil from Mukesh. Anil does not have the kind of resources necessary to enter petrochemical business or Oil Exploration. The only aspect of RIL's business that ADAG could have considered, was online retailing to compete with Reliance Retail's physical store model. Mukesh on the other hand, had the resources, the interest and the experience to enter telecom as well as finance domains. So the agreement effectively restrained Mukesh, and protected Anil.
Thirdly, ADAG has been hurt on several fronts. The recent SC verdict against RNRL is just one of them. RCOM is involved in a bruising price war, and has the lowest ARPU in the industry. They are also financially strapped because of 3G/BWA auction. RInfra is involved with long term projects that are capital guzzlers for several years, before they start making money. RCapital is also in a similar situation with its forays into Insurance. RPower is fighting Tata Power for Mumbai distribution network. Reliance BIG's entertainment initiatives are doing so-so. While they had some blockbusters, they have had their share of duds as well - even a high expectation acquisition like Kites looks like it will bomb at the box office.
On the face of it, this agreement looks like opening a lot of doors for Mukesh, without helping Anil in any significant way. The market's expectation that Mukesh got this deal in return for giving Anil reasonable terms for gas does not look correct. Remember, the non-compete agreement was supposed to terminate in 2 months anyway, so there was no reason for Mukesh to give Anil anything in return for this agreement.
However, I think this announcement is just a signal for much more significant announcements to come over the next couple of months. Maybe a merger is too much to expect, but I would not be surprised if Mukesh takes a role in RCOM, RInfra and infuses much needed capital. In return, Anil might get some reasonable terms for gas, as well as a stake in Mumbai Indians. While Mumbai Indians might not be big in the radar of Anil Ambani, it would still be a coveted asset.
This is possibly the best possible environment for a rapproachment between the brothers -
- Political issues have receded with Amar Singh no longer in the SP.
- It was always Anil who insisted on the split - Mukesh was never that keen.
- Anil needs a lot of cash, whereas, Mukesh is looking for areas to invest cash. RIL is likely to dramatically increase its cash generation with KG gas generation coming on stream.
Expect announcements on these lines over next few weeks, probably close to May expiry or June expiry. The Ambanis will not miss the opportunity to take advantage of market pops on such an announcement, and timing it close to expiry will give them the easiest way to play the game.
Firstly, some background. Back in July-August 2005, when the split agreement was thrashed out, both brothers entered into a non-compete agreement. The duration of this agreement was for 5 years, and it prevented the brothers from stepping on each other's toes. So, in a sense, today's announcement is nothing special - the agreement was anyway supposed to expire in a couple of months.
Secondly, in reality, the non-compete agreement was in place only to protect Anil from Mukesh. Anil does not have the kind of resources necessary to enter petrochemical business or Oil Exploration. The only aspect of RIL's business that ADAG could have considered, was online retailing to compete with Reliance Retail's physical store model. Mukesh on the other hand, had the resources, the interest and the experience to enter telecom as well as finance domains. So the agreement effectively restrained Mukesh, and protected Anil.
Thirdly, ADAG has been hurt on several fronts. The recent SC verdict against RNRL is just one of them. RCOM is involved in a bruising price war, and has the lowest ARPU in the industry. They are also financially strapped because of 3G/BWA auction. RInfra is involved with long term projects that are capital guzzlers for several years, before they start making money. RCapital is also in a similar situation with its forays into Insurance. RPower is fighting Tata Power for Mumbai distribution network. Reliance BIG's entertainment initiatives are doing so-so. While they had some blockbusters, they have had their share of duds as well - even a high expectation acquisition like Kites looks like it will bomb at the box office.
On the face of it, this agreement looks like opening a lot of doors for Mukesh, without helping Anil in any significant way. The market's expectation that Mukesh got this deal in return for giving Anil reasonable terms for gas does not look correct. Remember, the non-compete agreement was supposed to terminate in 2 months anyway, so there was no reason for Mukesh to give Anil anything in return for this agreement.
However, I think this announcement is just a signal for much more significant announcements to come over the next couple of months. Maybe a merger is too much to expect, but I would not be surprised if Mukesh takes a role in RCOM, RInfra and infuses much needed capital. In return, Anil might get some reasonable terms for gas, as well as a stake in Mumbai Indians. While Mumbai Indians might not be big in the radar of Anil Ambani, it would still be a coveted asset.
This is possibly the best possible environment for a rapproachment between the brothers -
- Political issues have receded with Amar Singh no longer in the SP.
- It was always Anil who insisted on the split - Mukesh was never that keen.
- Anil needs a lot of cash, whereas, Mukesh is looking for areas to invest cash. RIL is likely to dramatically increase its cash generation with KG gas generation coming on stream.
Expect announcements on these lines over next few weeks, probably close to May expiry or June expiry. The Ambanis will not miss the opportunity to take advantage of market pops on such an announcement, and timing it close to expiry will give them the easiest way to play the game.
