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Searching For A Partner
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Apparently, the move goes in line with what the senior Ambani proclaimed in RIL's latest annual report: "Growth through partnerships will be a key part of our strategy." Traditionally, Reliance has had the reputation of going it alone even for the biggest of projects, but that philosophy has been changing lately.
In the past five years, RIL formed more than 50 partnerships. Recently, it announced tie-ups with British oil major BP, New York-based investment and technology major The D.E. Shaw group and three shale gas players in the US — Pioneer Natural Resources, Carrizo Oil & Gas and Atlas Energy (which was recently bought by Chevron). In addition, RIL and Russia's petrochemicals giant Sibur entered a joint venture to set up a facility to produce 100,000 tonnes of butyl rubber (a synthetic rubber with a variety of uses) in India.
Last year, RIL bought 95 per cent stake (with an investment of Rs 4,202 crore) in Nahata family-owned Infotel Broadband Services. Infotel was a successful bidder in all the 22 circles for broadband wireless access spectrum. RIL had paid nearly Rs 12,850 crore to buy the spectrum. It envisages that a tie-up with an established player will help it roll out world-class 4G network and services in India.
"Infotel needs the technology, equipment and operational skills to launch such a 4G network. Companies such as Verizon are potential players in this area. It makes sense for RIL to partner with such a player to become the leader," says an analyst from a foreign bank. A case in point is RIL's partnership with an established player such as BP — the tie-up is aimed at getting technical assistance for improving operations in the KG Basin fields.
A mighty partner in 4G and broadband makes sound business sense for RIL given that wireless services are not a small business globally. America Movil, a leading provider of such services in Latin America, has made Carlos Slim the world's richest person. "The established US telecom giants would be now looking for an opportunity in growing markets such as India since their home markets are saturated," says an industry source. No global major has been able to secure a significant foothold in India's telecom sector, except the late entrant Vodafone.
Over the next five years, RIL plans to invest over Rs 20,000 crore to build broadband network — not a big amount given that the group plans a total investment of Rs 1.5 lakh crore ($9.5 billion) over the same period. Considering that RIL's Ebitda (earnings before interest, tax, depreciation and amortisation) was Rs 41,178 crore in the past financial year, such capital-intensive projects will not be a big worry.
Last fiscal, RIL's cash and cash equivalent (bank accounts, marketable securities, etc.) stood at Rs 42,393 crore, powered by the Rs 9,004 crore ($2 billion) it received from BP as part of the $7.2-billion deal. BP owns 30 per cent stake in RIL's 23 oil and gas-production sharing contracts in India, including the flagship KG-D6 block.
Still, RIL indicated that it would be a challenge to profitably deploy cash of about $9.5 billion, according to analysts from investment bank Goldman Sachs. As on 31 March, RIL's total debt stood at Rs 67,397 crore — 85 per cent of long-term debt and almost all of the group's short-term debt was denominated in foreign currencies. Given the scenario, an equity partner in broadband business will help RIL keep the net gearing at low levels, says a corporate executive. Makes perfect sense.
(This story was published in Businessworld Issue Dated 30-05-2011)