What You Don’t Know About Facebook’s Investment In Jio Platforms
It will go down in India Inc.’s history as one of the fastest deleveraging efforts, and a resounding success at that.
Besides its largest-ever rights issue, over two months Mukesh Ambani-led Reliance Industries Ltd. inducted 11 investors in subsidiary Jio Platforms Ltd., raising Rs 1.17 lakh crore. On paper, Ambani’s flagship is 'net debt zero' nine months ahead of schedule. In reality, the proceeds of the fundraising programme will all come in by 2020-21.
Like all things Ambani, the fundraising has been a carefully strategised one—in an effort to build anticipation among prospective investors as well as existing ones.
For instance, the first investor announced was Facebook Inc. One of the world’s largest social media companies with a market cap of $677 billion, over four times that of RIL, though it earns a revenue $16 billion short of India’s largest company.
Then, RIL announced a few more investors, such as Silver Lake, Vista and General Atlantic, then the rights issue at a 10% discount to the market price, and then the Jio Platforms’ investor count began to climb again. This sequence, intended or otherwise, helped buoy the company’s stock price, drawing further investor interest (FOMO) and making the rights issue that much more attractive. The mega Rs 53,124-crore issue was oversubscribed 1.59 times.
Let’s go back to the first mover—Facebook. It not only brought marquee value, it’s also the largest investor buying almost 10% in Jio Platforms for Rs 43,574 crore, whereas the 10 others have purchased on average 1-2% each. Facebook is also the only one of the 11 that stands to gain strategically from this investment. Facebook owns WhatsApp and hopes to combine India’s most popular messaging app with Reliance’s retail business to push into e-commerce. That will be the first serious effort WhatsApp will make towards monetisation in India. Besides, Jio Platforms seems to be adopting the platform approach that Alibaba Group, Tencent Holdings and others have successfully used to carve out large slices of China’s internet ecosystem. Facebook could aid and benefit in that effort.
The stake size and strategic intent of Facebook’s investment explains the one seat the company will have on Jio Platforms’ board.
What Is Jio Platforms Worth?
At the time of Facebook’s investment, RIL disclosed the transaction was done at a pre-investment enterprise value of Rs 4.62 lakh crore for Jio Platforms. Enterprise value consists of equity value plus debt, minority interest and preferred shares minus cash. The company did not provide any breakup then.
At the time of announcing its fourth-quarter earnings, RIL disclosed that Jio Platforms' equity value prior to the Facebook investment was Rs 4.21 lakh crore. That indicated the remaining Rs 41,000 crore was debt.
In the same investor presentation, RIL said that after the Facebook transaction, Jio Platforms’ equity was valued at Rs 4.36 lakh crore.
By the end of the fundraising process, the company said, the equity value of Jio Platforms stood at Rs 4.91 lakh crore.
What Discount Did Facebook Get?
The annual report of Reliance offers further insights regarding Jio Platforms’ equity value.
Reliance incorporated Jio Platforms in November 2019 with Rs 4,961.3 crore of equity and Rs 1,77,025 crore in 0.1% optionally convertible preference shares. The equity shares and OCPS have a face value of Rs 10 each. Thereby giving the tech platform an equity base of Rs 1,81,986 crore, according to RIL’s FY20 annual report. Each OCPS will be converted into an equity share unless redeemed at Rs 20 per OCPS before 10 years.
According to BloombergQuint’s calculation, a pre-investment equity valuation of Rs 4.21 lakh crore values each Jio Platforms share at Rs 23.10 on a fully diluted basis.
The Facebook investment of Rs 43,574 crore for a 9.99% stake was via purchase of new shares, subsequent to which Jio Platforms’ equity valuation rose to Rs 4.36 lakh crore.
The Facebook stake does not decline below 9.99% despite the next 11 transactions, which took place at a 12.5% premium to what the social media giant paid.
Of the money raised from Facebook, Jio Platforms would use Rs 28,598 crore to redeem the OCPS at Rs 20 apiece and retain the remaining Rs 14,976 crore, RIL said in an analyst presentation. The OCPS redemption would reduce Jio Platforms total equity to Rs 1,80,556 crore.
Therefore, according to BloombergQuint calculations, Jio Platforms issued 2,407.38 crore shares to Facebook at Rs 18.1 apiece—that’s a discount of nearly 21% to the pre-investment value of Rs 23.10 per share.
To be sure, the shares allocated to Facebook were calculated based on fully diluted equity after all the 12 transactions.
An email to RIL seeking confirmation of these valuations remained unanswered.
After the Facebook deal, Silver Lake invested at a 12.5% premium to valuation of the Facebook transaction, the company said in a release. The deal pegged Jio Platforms’ equity valuation at Rs 4.90 lakh crore, selling the shares at Rs 20.50 apiece to the investor, according to BloombergQuint's calculation.
The subsequent 10 transactions took place at an equity valuation of Rs 4.91 lakh crore at a per-share price similar to the Silver Lake deal. The enterprise value would be Rs 5.16 lakh crore, said the company.
In total, Jio Platforms sold 25.10% in fresh equity to 11 investors. At the completion of the fundraise, it would have an equity capital of nearly Rs 2.40 lakh crore.
How It Compares With Global Peers
RIL has repeatedly said that Jio Platforms was created to unlock value for shareholders by creating a technology firm like Alphabet Inc. or Tencent Holdings that fetch better value in the global markets.
According to a note by Centrum Broking:
- Alphabet, Google’s parent, with a revenue of $132 billion, is valued at 11.7 times its estimated enterprise value-to-Ebitda ratio for 2021.
- Tencent, with a revenue of $55 billion, is valued at 17.8 times its estimated EV/Ebitda for 2020.
- Facebook, with a revenue of $70 billion, is valued 11.5 times its estimated EV/Ebitda for 2021.
The brokerage expects Jio Platforms to report an Ebitda of Rs 41,788 crore in 2021-22 fiscal. Based on its enterprise value of 5.16 lakh crore, the valuation works out to 12.3 times its EV/Ebitda for FY22. That’s a premium to Facebook but a discount to Alphabet and Tencent.