How does this latest acquisition fit into the Reliance Retail story?
On 15 July, Reliance Retail announced that it would pay over Rs.5,400 crore to buy a 67% stake in Just Dial. This would make Reliance the largest shareholder and reduce Mani’s take to 10.35%.
How is the deal structured?
The Reliance Retail buyout of Just Dial will be spread across 3 phases. Firstly, Just Dial will make a preferential offer to RRVL after which VSS Mani and family will hive off part of their stake to RRVL. In the third phase, Reliance Retail will make an open offer to 26% of minority shareholders. Once the 3 phases are over, RRVL is expected to enhance its stake in Just Dial to over 67% and the stake of the VSS Mani family will fall to around 10.35%. Mani will, however, continue as MD and CEO of Just Dial.
How does Just Dial gain
For Just Dial, the biggest challenge was how to take on competition. While JD has a 25 years legacy, the local search engine was increasingly becoming very commoditized. Just Dial always knew that without adequate capital buffers and a large balance sheet, it would find it hard to take on the likes of Google and Wal-Mart in this business. The RRVL deal gives the necessary balance sheet heft to Just Dial. The deal will also offer a more profitable way to monetize the intangible digital franchise built by Just Dial a lot more effectively. After all, RRVL has a strong sales proposition.
RRVL gains both ways
If you compare the price paid by RRVL for Just Dial, it is at a premium to the current valuation. That is justified from the point of view of control premium. But there are other merits. RRVL gets another digital asset to plug on to its retail-cum-digital offering. Also, Just Dial brings two distinct advantages. Firstly, JD comes with a high-quality customer database of over 12 crore customers. This will be a natural progression for the retail thrust. In addition, JD also brings with it over 3.2 crore verified listings of small and medium-sized businesses, which fit into RRVL’s plans to create a retail digital ecosystem for the business. In short, RRVL not only has the need but also the digital reach to capitalize on the database of JD in the most effective manner, so as to enhance its value.
What should JD investors do?
That is the real million-dollar question. The immediate reaction may have been cautious, but that is expected in the midst of all the euphoria around stand- alone digital plays. But investors must also appreciate that RRVL brings in a much better fulfilment ability to Just Dial and that is worth its weight in gold. Also, investors in JD can now wait for the synergies of the merger to kick in, and that is likely to be value accretive in the medium term. In a way, this is the right deal, in the right place at the right time. Now, it is over to the markets!