Facebook stake in Reliance Platforms could have larger implications
The much talked deal between Reliance and Facebook finally happened during the week. Facebook announced its investment of $5.7 billion into Reliance Platforms (owner of digital assets of Reliance) for a 9.99% stake. This would mark one of the biggest investments for a minority stake in an Indian business.
What the deal entails?
Under the deal, Facebook will invest $5.7 billion into Reliance Platforms for a 9.99% minority stake. Reliance Platform is a subsidiary of Reliance Industries and owns telecom and digital properties of the group. This values the digital business alone at $57 billion. But the deal is apparently a lot more beyond just an investment. This deal would also entail better product sync between Facebook and Reliance. Now, Facebook needs a local platform to ride on and Reliance Digital with its 38 crore client base is best equipped to give them this kind of a base they were also looking for. But the real gist of the deal may be all about the retail Kirana strategy. The ubiquitous presence of Facebook and WhatsApp gives Reliance an easy vehicle to migrate shoppers and shop keepers onto Jio Mart. For Facebook, this deal is all about a big shot at better monetization of the Facebook and the WhatsApp franchise. After all, revenue per user for Facebook and WhatsApp in Asia is nearly 1/10th of what it manages to earn in countries like the US and in Canada. That is the icing on the cake.
The Kirana story
If there is one story that the Facebook deal is all about, then it is about the Kirana story. For Reliance, the Kirana story has two important implications. Firstly, it allows them to migrate the millions of individual customers and shop keepers on the Jio Mart platform. Secondly, Reliance will be able to build a better interface to manage inventory as the 30 million Kirana stores across India do not have the financial muscle or the wherewithal to handle inventory. The M- Pos platform will be used to help the Kirana shop owners to handle inventory through a central interface. Facebook sees the Kirana story as a means to reach out to paying customers and become part of the shopping experience allowing Facebook a better shot at monetizing their social platforms.
Winding down Reliance’s debt
Over the last five years, the total debt of Reliance group has gone up 2-fold and interest cost is up 5-fold. The aim of the group is to reduce its net debt (at Rs.1.5 trillion) down to zero in the next two years. With the Aramco deal looking very unlikely in the current oil market conditions, this allows RIL to start its debt reduction process. Out of the Rs.46,000 crore, RIL expects to use at least Rs.28,000 crore to reduce its debt. Clearly, that will do a world of good for RIL’s long term valuations. Monetizing assets fits in perfectly for Reliance!